"I came here to drink milk and kick ass. And I've just finished my milk." - Moss, The IT Crowd

Thursday, June 16, 2011

Setting the Record Straight on Prepaid, Part 4

What is Regulation E and when does it apply?

Well, if I were to answer that question thoroughly with plenty of examples and detailed explanation, it would take about 20 or 30 pages and you would be ready to fall asleep by the end of it. I know, because I wrote a document like that for a previous employer. I’ll give a simplified overview here; it won’t cover all the nuances, but should give you a reasonable idea of what’s going on.

Regulation E applies only to consumer accounts. It does not apply to accounts held by business entities, or to anything which is not an “account” as defined in the regulation (which is why it generally doesn’t apply to non-reloadable prepaid cards). The best-known parts of Regulation E protect the consumer from being liable for the full amount of unauthorized charges or electronic transfers, as long as the disputed charge meets certain requirements (for example, you can’t call a charge “unauthorized” just because the merchant who charged your card later refused to let you return an item you decided you didn’t want) and the consumer reports the unauthorized charge within the timeframes set out in Regulation E. The cardholder agreement for the GPR card will provide information on how the cardholder can report unauthorized charges.

Setting the Record Straight on Prepaid, Part 3

It’s not a bank account. Why does a GPR card have FDIC insurance coverage?

While the funds of all the prepaid card customers in a specific GPR card program may be held together in a single pool of funds in a custodial account, the FDIC-insured issuing bank and its regulators require the program manager to maintain an accurate accounting of the amount of funds associated with each individual GPR card account, and to retain identifying information about the primary cardholder for each card account. Because the underlying owners of the funds (i.e., the cardholders) are known and individually identifiable, and since the exact amount belonging to each cardholder is known, each cardholder receives FDIC insurance protection up to the full FDIC limits on his or her card account. That is, the custodial account may contain in excess of $250,000 (the limit of each individual depositor’s FDIC insurance coverage at a specific insured bank), but each card account is fully insured up to the FDIC limits regardless of the total sum held in the custodial account. This issue was settled by an FDIC advisory opinion issued on commingled deposit accounts (in that specific case, for payroll cards) as of August 16, 2002. A further clarification affirming the applicability of this rule to stored value cards and other “nontraditional access mechanisms” was issued by the FDIC on November 13, 2008.

Setting the Record Straight on Prepaid, Part 2

What’s the difference between reloadable and non-reloadable? And who’s got my money?

Let’s talk a bit about how prepaid cards work behind the scenes. For a given prepaid card brand, the company which processes the card transactions, arranges production of the physical cards, manages the distribution channels, provides the customer service, and levies the card fees, is the “program manager.” The program manager, as a rule, is not a bank, which means that the program manager does not serve as a repository for the customer’s funds. The customer’s funds are stored in an account at an actual bank, known as an “issuing bank.” The account the funds are stored in is known as the “custodial account” because the issuing bank is acting as the custodian of the funds.

Setting the Record Straight on Prepaid, Part 1

This blog post will be a departure from what I’ve written so far. My two rules to date have been (1) no discussions about my work and (2) no discussions about my personal relationships. However, I’m going to bend Rule # 1 a bit today.

See, I’ve worked for several years in prepaid debit cards, although I’m not employed in the industry currently: my work primarily involved general-purpose reloadable cards, or “GPR” cards, sold directly to individual consumers. I’ve had a bunch of different roles, but most recently my job responsibilities involved analyzing legal and regulatory compliance issues. Regulation in the prepaid space is not normally a topic I’d opine on in a public forum, but I feel like I need to counteract some of the misinformation that is being propagated in news coverage of the prepaid space.