By Adam Atlas
Attorney at Law
Issuing is the new acquiring. Formerly, card issuing strictly involved printing physical cards and sending them by special delivery to cardholders, who would then call their issuers to activate their cards, then start spending via card-present transactions. That was your dad's issuing business. Today's issuing involves issuing thousands of single-use prepaid debit or even credit cards, also known as virtual account numbers (VANs) that fly around the world in seconds to be "presented" at acquirers who might also be creating payfac sub-merchant accounts in similar quantities to help accept them. This article highlights issues related to the torrent of issuing occurring now – without out knowledge.
A VAN, or virtual account number, comprises the same 16 digits we are used to seeing on credit and debit cards and, but for the lack of a physical card, performs the same function as a physical payment card. A VAN has an issuer and authorizations and card balances that enable the cardholder to spend with the VAN. A virtual card can be uploaded to a phone wallet and enable NFC payments from the phone.
Issuing is the poor man's money transmission. For a payments company to send value from Person A to Person B, a payment company normally requires money transmitter licenses from each state and a registration with the U.S. Department of the Treasury Financial Crimes Enforcement Netork (FinCEN). That process takes a long time and costs about $2 million. So, fintech startups and other payment companies stumbled across just-in-time card issuing to get money out the door and into the hands of intended payees. Since, in the United States, issuers are all banks, the issue of money transmitter licenses is often (but not always) quelled. For "affiliate payout" providers and business "supplier payments," VAN issuing is a convenient way to facilitate outdoing payments. A combination of the cost of money transmitter licensing and the ease of distributing VANs
Banks operate issuing programs using a program manager that is essentially an ISO, but for card issuing instead of acquiring. The program manager is like a "wholesale ISO" and takes charge of finding cardholders, hiring a processor to handle card issuing data, ensuring that cards are funded, monitoring card load transactions for AML and other suspicious activity and overseeing the compliance and security of the program. Issuing banks do surprisingly little. The program managers guarantee to the issuing banks that cards will be funded and provide first-line customer support to cardholders.
Given that VANs are issued by the thousands and can be used anywhere in the world in seconds, they engender AML concerns. The program manager, under the supervision of the bank, is charged with overseeing issuing programs and monitoring their use for AML issues. Program managers are also required by the Bank Secrecy Act to register with FinCEN.
Most states will not require a prepaid issuing program manager to obtain state money transmitter licenses provided that it doesn't handle funds related to the card program. For example, if the program manager itself collects the money in its own bank account, an MSB license is more likely required because the cardholder must rely on the program manager to deliver the funds to the issuing bank.
On the acquiring side, there are also AML concerns pertaining to acceptance of large numbers of VANs, as the merchant has legitimate basis for questioning the provenance of the funds being processed.
Issuers are able to set controls on their VANs so they can be used for only a specific SIC code or even a specific MID. These tools can substantially reduce fraud and money laundering in the single-use VAN issuing market.
With a vast number of VANs flying around the Internet, there is a substantial security concern that one or more parties will not keep them secure, thereby leaving them vulnerable to a hack and the ensuing losses.
ISOs might consider partnering with one of the growing number of issuing program managers (issuing ISOs) to provide their merchant clients with supplier payment services. ISOs are well positioned to solicit merchants for payment-related services. ISOs usually offer only services related to receiving payments. With issuing products, ISOs may be able to help merchants handle the additional function of outgoing payments to suppliers.
Payfacs and payment services providers, which tend to have additional technology offerings for their sub-merchants, are well suited for acceptance of VANs because their transactions are rarely card-present.
Issuers eat from the same plate as acquirers. Interchange, which for acquirers is a fixed infrastructure cost, is a revenue item in issuing programs. If you want to earn some of the interchange, you can become a card issuing ISO. Depending on the issuing program, the card issuer can also add monthly, load and other fees.
A lot more cards are issued than meet the eye. Many are VANs that are useful for no more than a day or so and used to fulfill a limited, specific payment obligation. Acquiring ISOs should consider this burgeoning market as a possible source of revenue to help merchants handle ourgoing payments.
On the acquiring side, ISOs should know their merchants are going to see an increasing quantity of cards being presented as simple VANs, some of which are actually emailed to the merchant (don't tell the PCI Council about that). ISOs may see an opportunity in pricing merchants who receive VANs according to the risk associated with this newer form of card.
Whether or not you are involved in the new rush into issuing, it's going to be a part of the acquiring industry, ready or not.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, attorney at law by email at firstname.lastname@example.org or phone at 514-842-0886.
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