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Updated: Thursday, July 2, 2015

Retail gift cards gain

G ood news on the prepaid card front: retailer gift cards, after losing ground in 2013, rebounded in 2014. The total of dollars loaded onto retail gift cards grew 9 percent last year, according to a new report from Mercator Advisory Group . "Closed-loop gift cards continue to be popular for retailers and their customers," said Ben Jackson, Director of Prepaid at Mercator Advisory Group, and author of the report, Retail Gift Card Trends in the United States: 2014 in Review. "Despite downward pressure in 2013, the market rebounded last year, and customers showed their affinity for closed loop prepaid cards."

Closed-loop card programs may also soon enjoy a regulatory advantage over open-loop prepaid card programs. The Consumer Financial Protection Bureau has been working on a set of proposals that would amend federal Regulations E (consumer EFT transactions) and Z (truth-in-lending) to cover general-purpose, open-loop prepaid cards. The rules, which are expected to be finalized in 2015, would not be applied to closed-loop retailer cards (gift cards), provided retailers issuing the cards operate physical locations where customers can obtain their prepaid gift cards.

Merchants of all types and sizes have been embracing prepaid cards as a way to grow revenues and drive customer loyalty. In fact, many have begun aggressively selling prepaid, according to Aite Group LLC Senior Analyst Madeline K. Aufseeser. "The number one reason that U.S. merchants embrace prepaid cards is because the cards create revenue and increase incremental store sales. Merchants may vary the types of prepaid cards they sell, but their commitment to the product set is clear and evident," she wrote in a recent Impact Note.

CFPB impact on market

But can that commitment continue in the face of new regulatory strictures? The Network Branded Prepaid Card Association and scores of others think not, and have blasted the pending CFPB proposals. "The imposition of unnecessary compliance burdens, when trying to fashion a one-size-fits-all rule, could ultimately limit consumer access to safe and reliable prepaid products and drive users to seek out riskier and less consumer-friendly alternatives," the NBPCA wrote in the comment letter it submitted to the CFPB regarding the proposal.

Evidence already indicates that retailers are retracting from open-loop card sales. When Afseeser surveyed merchants earlier this year she found 78 percent offer closed-loop gift cards, while 2 percent were planning to do so by 2016. Only 27 percent are selling third-party, open-loop gift cards; 53 percent sell third-party closed loop cards. When she asked the same question in 2014, 89 percent of merchants were selling third-party closed-loop cards; only 74 percent were selling their own closed-loop gift cards.

Prepaid cards – both open- and closed-loop – remain popular with consumers. According to Mercator, which regularly sizes the prepaid market, 56 percent of U.S. adults purchased prepaid debit cards last year, up from 53 percent in 2013 and 47 percent in 2012. The cards are especially popular with younger adults: two out of three consumers between the ages of 18 and 34 purchased prepaid cards last year, up from three out of five in 2013, Mercator reported in its December 2014 report titled Consumers and Prepaid: Rising Use, Especially by Mobile.

Mercator said the two fastest growing segments of the prepaid market last year were general-purpose reloadable (GPR) and general-purpose non-reloadable cards. Mercator's 2014 survey also pointed to changes in buyer demographics; high-income earners ($100,000 or more a year) were more likely to purchase GPR cards than in previous years.

Aite estimates Americans made more than $200 billion in retail purchases using prepaid cards last year, or about 5 percent of all retail spending in the U.S.

Square could be on hook for millions in chargebacks
Wednesday, July 1, 2015

O n June 26, 2015, Creative Creations Omaha owner Patricia Urbanovsky turned herself into local law enforcement after being charged with three felony counts of theft in connection with the sale of worthless travel vouchers. Investigators revealed that three former employees accrued $141,000 in personal credit card charges on behalf of Urbanovsky after she exceeded her own credit card limits to run the voucher scheme.

While Creative Creations has operated as a legitimate wedding and event planning and rental business, Urbanovsky apparently took a wrong turn when she allegedly created a nonexistent employee at Southwest Airlines to contract with for reduced airfare vouchers, which were subsequently resold to the public.

Starting in March, complaints surfaced that vouchers purchased through Creative Creations had not been funded for redemption. The Better Business Bureau said it received more than 1,500 public complaints involving about $1.3 million.

A number of consumers also disputed the voucher charges when Creative Solutions failed to pay out. San Francisco-based Square Inc. indicated that it had paid approximately $2.8 million in chargebacks as a result of disputed voucher charges. Square filed a criminal report against Urbanovsky, who is known to have opened an account with Square in October 2014.

Warning signs ignored?

Although businesses like Creative Creations may appear legitimate on the surface, payment processors must continuously monitor merchant activities. According to Monica Eaton-Cardone, co-founder and Chief Operating Officer at Chargebacks911, one way to prevent fraud by merchants who engage in consumer scams is to adopt a two-pronged approach.

The first step is to exercise consistent and thorough due diligence when boarding new merchants. "Before a merchant receives a credit card processing account, not only should their paperwork be validated, but human contact points should also be tested and verified – such as checking the business directory for a matching listing, calling the customer service phone number to test competency and using any website contact form to test the response," Eaton-Cardone noted.

The second step is to monitor the merchant's dispute reasons and chargeback trends, since heightened chargeback activity may signal a problem merchant. Even then, merchant fraud detection is a delicate matter. "Unfortunately, merchants who aim to scam consumers may pass these tests with flying colors," Eaton-Cardone said. "Fortunately however, this is where monitoring chargeback statistics is most valuable."

Monitor for red flags

She advises payment processors to monitor merchants when suspicious activities occur that could signal increased risk is just around the corner. Following are several red flags payment processors should not ignore:

Authorities involved in the Creative Creations case are continuing their investigation of Urbanovsky, who could face prison time if felony charges brought against her are deemed valid and enforced.

NYPAY, Deloitte take on real-time payments
Tuesday, June 30, 2015

N ew York-based payments organization NYPAY and Deloitte LLP co-hosted an event on June 26 to explore the meaning and impact of real-time payments. Approximately 60 financial services executives attended the three-hour session at Deloitte's New York offices, which included a networking hour and panel discussion.

The combined effects of high-speed communications technologies and changing trends in card-present, mobile and ecommerce payments schemes have spurred interest in real-time payments from all sides of the equation. Recent payments industry developments include:

Diverse views spark lively debate

In his opening comments, NYPAY President David True noted that there are many variations and definitions of real-time payments. This diversity of viewpoints was evident throughout the spirited discussion among panelists and audience members. Moderator Eric Piscini, Consulting Principal at Deloitte Banking and Technology was joined by the following panelists:

With no clear-cut definition at this point, achieving an overarching definition of real-time payments will continue to be a work-in-progress for the foreseeable future.

Shari Krikorian advanced MasterCard's focus on real-time payments through the eyes of the consumer. She said consumers want immediate access to funds in their bank accounts when making purchases. From a technology perspective this means a real-time authorization that results in an issuer posting money to a bank account.

PayNet's Eric Purdum concurred with the definition, stating "I'd add business to that concept, with funds posted to a business account immediately," as opposed to the inevitable delays involved with other transmittals such as fed wire transactions.

Chase’s Ben Isaacson said, "I'd echo Shari's comments about immediate availability of funds. Banks need to be an end-to-end system with risk management and governance that gives the bank the confidence to give the money [to a particular customer] right away."

Dan Gonzalez stated that the Federal Reserve has been involved in a far-reaching initiative to energize payments providers and make payments faster. He said the initiative extends "beyond the four walls of the banking system." Desired outcomes include faster payments; ubiquity of applications and technology, and safer payment processing that "doesn't exist today." Gonzalez framed his remarks with a disclaimer that his views were his own and not the official position of the United States government.

"We created a task force to bring together industry stakeholders to help define [real-time payments] where the commitment to pay can be as important as the settlement," Gonzalez said. He further noted that the Federal Reserve is exploring real-time payment as it relates to the following five use cases: emergency bill and healthcare payments; person-to-person payments; consumer-to-business bill pay; business-to-person payroll; and adhoc high value payments. Many of these categories are a vital concern for unbanked and under-banked consumers.

Future NY events slated

NYPAY has been hosting events since 2006 with the goal of connecting innovators and leaders from the payments-commerce arena. Merchants, networks, payment processors, startups, regulators and others are welcome to participate in future events.

NYPAY members and guests will reconvene on July 22 at MasterCard's New York City Tech Hub to explore "APIs in Fintech: What They Do and Why They Matter." The organization's third annual Unconference, a full day event co-hosted by Consult Hyperion, will be held on September 15 at the Microsoft Technology Center in New York City.

Criticism of CFPB grows
Friday, June 26, 2015

R ecent reports about computer hacks of government data bases, notably those run by the Internal Revenue Service and the federal Office of Personnel Management, are raising new concerns about the Consumer Financial Protection Bureau and the security of consumer financial information the agency collects to inform its policy making.

The CFPB was created as an independent federal consumer watchdog under the 2010 Dodd-Frank Act. That legislation gave the CFPB sweeping powers to collect all types of transaction-level information from financial institutions and their processing partners in support of its consumer protection activities.

At least one processor has already complained about the resulting workload, and has said it may pass along the costs to bank clients, according to the American Bankers Association. In a June 2, 2015, memorandum to state banking associations, the Washington, D.C.-based trade group urged its state affiliates to work with it to rein in the CFPB's financial data collection efforts

Soon after, Republican lawmakers delivered a stern rebuke to CFPB Director Richard Cordray concerning the agency's data collection efforts. "We are gravely concerned by the CFPB's inability to confirm that the massive amount of data it collects and stores could not be reverse-engineered and traced back to one of our constituents," a group of 23 U.S. Senators wrote in a letter to Cordray. "Our constituents have an absolute right to the security of their personal information, whether contained in a tax return at the IRS, personnel records at OPM, or in the bulk data that the CFPB is collecting on an ongoing basis."

Those signing the letter included several members of the Senate Banking Committee, which has oversight authority for CFPB.

Consumers say whoa

Results of a consumer poll released June 18 were equally critical of the CFPB. A majority of U.S. adults contacted by the polling firm Zogby Analytics said the agency's data collection efforts were as worrisome as the National Security Agency's controversial monitoring program.

That survey, commissioned by the U.S. Consumer Coalition, also revealed significant consumer opposition to CFPB proposals to rein in nonbank financial services companies, such as prepaid card and payday loan companies. The USCC describes itself as "a grassroots consumer advocacy organization." Its website lists two initiatives: consumer protection regulations and saving the alternative taxi service Uber.

"We have a powerful agency unilaterally regulating products and industries while subjecting Americans to an unprecedented invasion of their personal financial data, and it's clear Americans don't like it," said Brian Wise, Senior Advisor at the USCC. "They clearly oppose the agency's activities to invade their privacy, track their purchases, and efforts to tell them what products they can and cannot use."

Proposed prepaid, payday rules under fire

The CFPB, controversial from its inception, has come under increased criticism with its release of proposed new rules that would come down hard on payday lenders and extend many of the consumer protections for credit and debit cards to prepaid cards. (See "Congressman blasts CFPB's prepaid card plan" under Breaking Industry News,, for more on the CFPB's controversial prepaid card rules.)

The Zogby-USCC survey, conducted June 5 to10 2015, queried 3,604 adult Americans about the agency. Here are some specific findings:

Wise said the survey – the first poll to focus on consumer attitudes toward the CFPB ‒ validates concerns raised by his group and other detractors of the CFPB. "Americans have spoken loudly for the first time in this survey that they believe this agency is invading their privacy and restricting their freedom of choice in a way that makes them very uncomfortable," he said.

FCC declares Robo-geddon
Wednesday, June 24, 2015

I n response to numerous complaints from consumers and business owners about unwanted robocalls and spam text messages, The Federal Communications Commission released new, restrictive guidelines on June 18, 2015, for automatic telephone dialing systems that use prerecorded messages and artificial voice technologies for telemarketing. The newly updated FCC ruling has the potential to significantly affect companies that use call center software, exposing them to harsh penalties and statutory damages of between $500 and $1,500 per unsolicited message.

The FCC reportedly received 23 petitions filed under the Telephone Consumer Protection Act (TCPA), a law passed in 1991 and updated in 2013 that restricts unsolicited telemarketing calls, faxes, pre-recorded calls or autodialed calls, also known as robocalls. The new ruling brings much-needed clarification of TCPA guidelines for calls to landline and wireless phones. As the regulatory body tasked with enforcing the TCPA, the commission can review complaints, impose fines against noncompliant businesses and award damages to complainants.

The TCPA ruling also applies to text messages delivered to mobile phones. Merchants, marketers and consumer brands must have consumers' written permission to deliver short message service (SMS) calls for marketing, call center or collection purposes, the FCC said.

Limited exceptions

The FCC exempted financial and healthcare institutions that initiate urgent messages to consumers, such as fraud alerts or prescription refill notifications. However, it pointedly prohibits "other types of financial or healthcare calls, such as marketing or debt collection calls." It further grants consumers the right to opt out of these permitted calls and SMS messages at their discretion.

Attorney Kristi Lemoine of the FCC's Consumer and Governmental Affairs Bureau noted that downloadable applications installed on mobile devices with autodial capability are subject to TCPA guidelines. Individuals whose phone numbers are included in a mobile phone's directory of contacts must provide written consent prior to their being contacted by an autodial application. However, companies that develop and market the app would not be blamed if the app is used for noncompliant messaging unless these companies had initiated the calls.

Interactive, retroactive opt-outs

The FCC upheld the TCPA's October 2013 mandate requiring companies to obtain "unambiguous written consent" from consumers for autodialed phone and text solicitations. Manually dialed, scripted telemarketing calls that do not use pre-recorded messages are exempt from this ruling.

New TCPA guidelines stipulate that advertisers must announce interactive opt-out mechanisms at the beginning of every call and provide a way for consumers to opt out for the duration of every call. Advertisers must also maintain updated records of "abandoned calls," averaging no more than 3 percent for each campaign over a 30-day period.

An October amendment to the original 1991 ruling explicitly refutes the practice of businesses continuing to solicit consumers based on pre-existing relationships. "Established business relationship no longer relieves advertisers of prior unambiguous written consent requirement," the FCC stated.

Additionally, consumers who had previously opted in to receiving marketing communications from companies, including autodialed phone and text messages, can now change their minds by revoking "prior express consent," thus rendering former opt-in offers to be noncompliant with TCPA regulations and subject to penalties.

Expanded consumer resources

The Do-Not-Call Registry has been left largely intact, providing an additional resource that consumers can use to restrict unwanted telemarketing calls. The FCC noted its intention "to build on the Registry's effectiveness by closing loopholes and ensuring that consumers are fully protected from unwanted calls, including those not covered by the Registry."

TCPA guidance holds that consumer opt-ins and express consent do not apply to reassigned numbers, making it necessary for callers to continuously update their customer databases. The FCC recognizes that sometimes despite best efforts and due diligence a company may inadvertently autodial a reassigned number. The Commission provides an exemption for the first call to a reassigned number, giving the company the opportunity to remove the number from its active subscriber database. Subsequent calls to the reassigned number, in the event that the new subscriber has not consented to receive marketing calls, could result in fines and penalties. Landline and wireless carriers may also offer new ways for subscribers to block autodial messages and robocalls. Business analysts expect the FCC to issue more guidance on emerging "robocall-blocking technologies."

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