The outbreak of the coronavirus was a defining moment in the usage of the currency. Several of us reduced our dependence on cash in day-to-day activities as a result of lockdowns enforced across many countries and worries about the possibility of catching COVID-19 via ATMs or banknotes. As our societies' cashless habits grow more established, new financial instruments are created to meet various financial demands. Prepaid cards have proven to be a popular alternative to not just cash but also regular credit and debit cards.
Prepaid Cards
Prepaid access can be used for a wide range of goods, features, and technology. Physical access, in the form of prepaid cards, is now the most common method of payment, and it is extensively utilized by governments, corporations, and individuals. Most payment networks demand that their branded prepaid cards be issued by a payment network member bank.
Prepaid cards can be used in either an "open" or "closed" loop. Open-loop prepaid cards can be used to make purchases at any retailer that accepts cards issued for use on the payment network linked with the card, as well as to withdraw cash from any ATM connected to the related ATM network. Payroll cards, general-purpose reloadable (GPR) cards, and some gift cards are examples of open-loop prepaid cards. Some prepaid cards may be reloaded, enabling the cardholder or another individual (such as an employer) to give money to the account. Closed-loop prepaid cards can mainly only be used to purchase products or services from the merchant who issued the card or a limited number of merchants or service providers who are members of a certain network. Merchant-specific retail gift cards, mall cards, and public transit system cards are examples of closed-loop prepaid cards. Closed-loop prepaid cards do not typically enable cash withdrawals, although they may frequently be traded on third-party platforms in exchange for additional closed loop cards or payment by check, ACH, or other means.
Prepaid cards are extremely adaptable and may be tailored to fit the demands of any program. Some prepaid card systems, such as flexible spending account (FSA) or health savings account (HSA) cards that may be used to buy particular health-related services, are created for specific limited-use objectives. State and federal government agencies utilize prepaid programs to dispense government benefits (e.g., disability, unemployment, etc.) and give income tax refunds, while companies use them to send wage and salary payments.
Prepaid cards, like debit cards, are a convenient and portable way to save and access money. Prepaid cards are used for a number of purposes, including purchasing items, transferring funds to other cardholders within the prepaid program, and paying bills. They also provide an alternative to cash and money orders for people. A limited number of prepaid card systems may issue several cards per account as an alternative way of cross-border money transmission, allowing people in another nation or jurisdiction to access funds loaded by the original cardholder via ATM withdrawals or merchant transactions. Risk-based consumer due diligence on the initial cardholder should be undertaken for such schemes, and transactions should be exposed to risk-based monitoring.
Risk Factors
Money laundering, terrorist funding, and other illegal activities can occur with prepaid access and prepaid card schemes, just as they do with conventional payment instruments if adequate controls are not in place. Some prepaid cardholders, for example, have used fake identities and financed their first loads with stolen credit cards or have acquired several prepaid cards under aliases, according to law enforcement investigations. Because many local and abroad banks offer prepaid access services or products with international currency access via ATMs, fraudsters may load cash from unlawful sources onto prepaid access products and transmit it to collaborators inside or outside the United States during the placement phase of money laundering.
Prepaid cards issued in the United States may often only be loaded there. Both open and closed-loop prepaid cards have been used in combination with, or in substitute of, bulk cash smuggling, according to investigations. Despite the fact that prepaid access is becoming increasingly regulated and issued by strictly regulated institutions, third parties that promote or distribute prepaid access programs may or may not be subject to regulatory obligations, supervision, or control. Furthermore, these criteria may differ from one party to the next.
Risk Mitigation
Banks that provide prepaid access or otherwise engage in prepaid access programs should have strategies, procedures, and processes in place to manage the AML risks associated with them, as required by the FATF and implementing laws, as well as payment network standards.
AML risk mitigation is a critical component of prepaid access programs, and it entails several crucial elements:
- Carrying out comprehensive due diligence on any third-party service provider.
- Conducting a risk analysis of the prepaid access product, including its features and distribution and loading methods.
- Looking for unusual or suspicious activity in transactions done or undertaken by, at, or through the bank.
- Product characteristics and usage restrictions.
