Since making their debut in the 1990s, prepaid cards have become increasingly popular over the years. The last U.S. Federal Reserve Payments Study found that payments using prepaid cards between 2009 and 2012 grew at an annual rate faster than other forms of payment, including credit, debit, and check.
By 2022, the global market for prepaid cards is expected to grow to $3.1 trillion. Demand will come from sources such as unbanked individuals seeking greater financial inclusion and consumers looking for convenient and affordable ways to pay online.
It’s easy to see why prepaid cards are so widely used. While closed-loop cards such as gift cards can only be used at specific merchants, open-loop cards with payment networks, including Visa, MasterCard, and American Express are widely accepted and offer consumers complete freedom of choice in terms of how to use them.
However, the convenience and ease of acquiring prepaid cards also makes them more susceptible to misuse. In many cases, these cards can be purchased anonymously from retail stores and could be used to commit crimes like fraud or money laundering.
What can prepaid card providers do to address the potential risks?
Managing Risk for Prepaid Cards
In many respects, the way that prepaid cards – particularly those that can be reloaded with additional funds – are used parallels that of accounts held at banks or companies providing money transfer or remittance services. As a result, the Financial Action Task Force (FATF) issued a guidance document in June 2013 that provided details of its recommendations for anti-money laundering (AML) and know your customer (KYC) requirements for prepaid cards issued by financial institutions. U.S. regulators released their own guidance as well in March 2016. In essence, these cards are considered the same as bank accounts from an AML/KYC compliance standpoint, meaning that the same level of due diligence must be carried out.
Using online identity verification for prepaid cards can be an effective way of preventing this popular form of payment from being misused. Verifying the identities of prepaid card users not only reduces fraud but also can prevent money laundering or terrorist funding through the use of watchlists.
“The use of prepaid cards is growing at an unprecedented rate along with the number of scams,” said Jon Jones, President at Trulioo. “Keeping costs low while maintaining high levels of security will be vital for prepaid card providers to attract new customers, and having a best-in-class online identity verification solution will offer an unparalleled competitive advantage.”