The Prepaid Press - January 2009 - (Page 20)

PAYMENTS & PROCESSING Dec. 2008 / Jan. 2009 - 20 Economic Crisis Sharpens Focus on Stored Value Cards from page 1 protect the financial interests of prepaid/stored value cardholders. On September 11, 2008, Consumers Union, The Consumer Federation of America, The National Consumer Law Center and the U.S. Public Interest Research Group filed a joint petition requesting FTC action to protect consumers purchasing retail gift cards from losing “billions of dollars” should the retailer either declare bankruptcy or go out of business. The consumer groups argued: Gift cards do not have adequate consumer protections…. Consumers are now discovering their gift cards may be greatly devalued or not worth anything at all when a retailer declares bankruptcy. There is no guarantee to consumers that they will be able to obtain the prepaid value on their gift cards from struggling or bankrupt retailers. FTC Action Requested. The groups asked the FTC to declare the sale of retailer gift cards to be an unfair and deceptive practice if the cardholder funds are not segregated from other corporate funds at the time of purchase and then held in a trust. The groups also asked the FTC to develop new rules that are consistent with this approach: rules to require retailers to segregate cardholder funds from other corporate funds at the time of purchase, hold the funds in a trust for cardholders and automatically honor a gift card from those funds for goods or services until or unless a bankruptcy court orders otherwise. In addition, the groups petitioned the FTC to protect consumers from losing money on retailer gift cards by: • Intervening in bankruptcy proceedings to request a court order that a bankrupt retailer accept its own gift cards at full value as long as the retailer remains open • Developing and maintaining an FTC registry on bankrupt retailers’ gift card practices The FTC informed the consumer groups that it had revised a previously issued FTC Consumer Alert “Buying, Giving, and Using Gift Cards” to help consumers realize there is a risk… • Requiring retailers filing for bankruptcy to report to this FTC registry at the time of filing and make this information public within one business day • Requiring bankrupt retailers to stop selling gift cards no later than the date of the bankruptcy filing • Requiring bankrupt retailers to inform third party vendors that they must immediately cease sale of the retailers’ gift cards • Requiring third party vendors to immediately cease sale of gift cards for bankrupt retailers. FTC’s Interim Response. In an “interim reply” to the consumer groups, the FTC wrote, on November 14, 2008, the “petition raises a number of significant and complex factual and legal questions, particularly with respect to bankruptcy law” and said it needs more time to analyze these issues as they “can greatly impact consumers and businesses”. However, the FTC informed the consumer groups that it had revised a previously issued FTC Consumer Alert “Buying, Giving, and Using Gift Cards” to help consumers realize there is a risk; they may not obtain the full value of their gift cards if a retailer files for bankruptcy or goes out of business. Such a measured regulatory response is usually welcomed by businesses. This response however may cause more problems than it resolves: it highlights the risks of buying a retail gift card without providing consumers with any information on how retailers are mitigating these risks. It provides grist for competitors to argue the dangers of such programs and gives the press a running start to craft stories that could make even the most rational consumer fearful of all retail gift cards. FDIC Insurance Coverage. The FDIC first attempted in a 1996 general counsel opinion to detail the instances when stored value cardholders’ funds would be federally insured. In 2004 it proposed, but never finalized, a regulation to provide even greater clarity and certainty. In the interim, a number of prepaid card programs relied on existing FDIC regulations and interpretations to support their assertion that cardholder funds placed in a pooled account are FDIC insured on a “pass through” basis, as long as appropriate records are kept and certain other formalities observed. During a period when only a few banks failed, there seemed to be little need to resolve the issue with absolute certainty, especially when other issues - like restrictions on fees and disclosures and antimoney laundering compliance – seemed to be higher priority. However, following several well-publicized bank failures in early 2008, the priorities appeared to shift. In anticipation of a series of more and even larger bank failures, the four consumer groups sought more certainty by asking the FDIC in late August to close “gaps in the deposit insurance safety net” created by the development of various types of prepaid cards. Criminal Penalties At Stake? The need to resolve the actual insurance status of prepaid card products took on even greater significance with the enactment of the Emergency Economic Stabilization Act of 2008 in October. The new law prohibits any person from representing or implying a deposit or “obligation” is federally insured or guaranteed if it is not and provides for criminal penalties if the statute is violated. FDIC’s Position. In a substantially revised, and infinitely more understandable, general counsel’s opinion published in November 2008, the FDIC clarified how cardholders’ funds in open loop (e.g. general purpose) and closed loop (e.g. retail gift) card programs would be treated for federal deposit insurance purposes. The FDIC said funds underlying any type of prepaid card program will be treated as “deposits” if the funds are placed at an insured depository institution. Cardholders, however, will be treated as “insured depositors” only if the FDIC’s standard recordkeeping requirements are satisfied (i.e. the account records disclose an agency or custodial relationship, the identity of actual owners of the funds and the amount owned by each and the account is actually owned by the purported owners and not the custodian or another party.). If these requirements can be satisfied, each cardholder is entitled to deposit insurance coverage of up to $250,000 - the new temporary federal limit – regardless of the number of other cardholders with funds in the “pooled account”. If these requirements cannot be satisfied – as is the case most frequently in retail gift card programs – no In response to some of the more pressing concerns about the safety of prepaid/stored value cardholder funds, the Federal Deposit Insurance Corporation (FDIC) and Federal Trade Commission (FTC) have acted recently. more than $250,000 of deposit insurance will be available to cover all of the deposits in the account regardless of the number of cardholders with funds in the account. The FDIC also “encourages” that accurate information concerning FDIC insurance coverage be displayed on the actual cards. The information should include the name of the institution where the funds are held and, when appropriate, a statement that the funds are insured by the FDIC to the cardholder. Special Guarantee Provides Added Coverage. As part of the U.S. government’s recent efforts to stabilize the economy, the FDIC announced it would guarantee, through December 31, 2009, all of the funds held in non-interest bearing transactional accounts at institutions participating in the Temporary Liquidity Guarantee Program’s Transaction Account Liquidity Guarantee. This program is a positive development for many prepaid card programs – especially retail gift card programs - where typically the cardholder cannot be identified and the maximum amount of federal deposit insurance available to cover all funds in the account is limited to $250,000. Rising Cost of Insuring Prepaid Card Funds. Recent spikes in both the number and size of bank failures and rapid depletion of reserves in the FDIC’s Deposit Insurance Fund have caused deposit insurance premium assessment rates to increase by 7 basis points in the first quarter of 2009. Another rate hike is anticipated for the second quarter of 2009. The American Bankers Association has estimated that each basis point increase in assessment rates results in a transfer of $700 million dollars from the banking industry to the FDIC. Historically, banks have absorbed the costs of deposit insurance premium rate increases. Depending on the contractual arrangement, the card issuing bank (or the bank holding the cardholder funds if different from the issuing bank) may try to pass the increased deposit insurance costs related to the program to the program manager or other party that may be contractually liable for such expenses. Special Guarantee Adds Further Costs. In addition, banks participating in the special Transaction Account Liquidity Guarantee program are subject to an additional annualized assessment of 10 basis points on all deposits over $250,000 in the account. If any of the funds in a prepaid card program’s account(s) are covered by the guarantee and thus subject to this additional assessment, the costs of the program would further increase unless the bank does not pass them along. National Banks Targeted. The FDIC’s new general counsel’s opinion did not appear to satisfy the consumer groups for long. Almost immediately after the opinion was made public, they asked the OCC to prohibit national banks from participating in prepaid card programs unless the cardholders’ funds are either held in individual accounts in the name of the cardholder or in a pooled account that meets the FDIC’s “pass-through” requirements discussed above. The consumer groups noted with concern that one bank’s prepaid card program was accepting direct deposits of pay and benefits with an express disclosure in the program’s terms and conditions that the cardholders’ funds were not being held in a way to qualify for federal deposit insurance covera

Table of Contents Feed for the Digital Edition of The Prepaid Press - January 2009

The Prepaid Press - January 2009 Economic Crisis Sharpens Focus on Stored Value Cards Industry Veterans Weigh In on 2009 Prepaid Opportunities Contents From the Publisher: Ready for Change? The Prepaid Press Thanks its Editorial Advisory Board Regulatory Rundown 2008 Milestones Prepaid Wireless Providers Capitalize on Economic Downturn Prepaid Telecom in Brief APCC Services Settles With Calling Card Providers Boost Mobile Offers All-in-One Prepaid Package SonarTel Prepaid Customers Can Use Accounts in More Countries BillSoft Selected by Integra Telecom Pingo Adds PC “SoftPhone” Calling kajeet, the Cell Phone Service for Kids, Wins Award Prepaid Wireless Roundup The State of Prepaid Technology: Wholesalers & White Label Services New Millennium Releases Wireless Survey Results 5 Minutes With Paul Amick, EVP & Co-Founder, PhoenixSoft Millions Could Cut Cell Phone Bills in Half New Virgin Poll Reveals Buying Habits The Legal Line BioPay Expands Offering for Underbanked IDT to Sell European Prepaid Payment Business iPayStation Launches Network for Distributor Stored Value Solutions Appoints New VP Cellular South Offers Mobile Banking for Regions Bank Javelin Research: Processor Important in Prepaid MiCash Announces New Prepaid Debit Card Monitise and eCommLink Partner Platamovil Selects PhoenixSoft’s Cirrus Softswitch Prepaid Market Forecasts to 2011 Payments & Processing in Brief Prepaid 101: Gift Cards SCA’s PrizeSuite Enables Promotions MT&L Offers Gift Card Removal and Destruction Heartland Payment Systems Acquires Chockstone Amex and Rymax Offer Gift Cards TransCard Announces Corporate Gift Card Website Gift Cards & Promotions in Brief Our Advertisers Contact Us

The Prepaid Press - January 2009

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