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FinCEN Issues Final Rule on Prepaid Access

Retailers Issuing Gift Cards and/or Selling Other
Companies’ Gift Card or Prepaid Cards Impacted

New anti-money laundering regulations that directly impact retail businesses that issue or sell gift cards or other prepaid cards have recently been released. These new regulations, known as the prepaid access “Final Rule,” currently effective on September 27, 2011, were issued by the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and require the collection and verification of customer information when certain prepaid cards are sold or reloaded. Retailers issuing their own closed loop gift cards, or selling and reloading other companies’ open and/or closed loop gift cards may be significantly impacted by the new Final Rule. (Print-Friendly Version)


Many retailers now issue (either directly or through a gift card company) their own gift cards useable solely to buy goods or services at their own locations. Such programs have in the past been deemed low risk. However, the new Final Rule may impact such programs depending on how such gift cards are sold and structured.

What is Closed Loop Prepaid Access?

Under the new Final Rule, “closed loop prepaid access,” is defined as “[p]repaid access to funds or the value of funds that can be used only for goods or services in transactions involving a defined merchant or location (or set of locations).” The definition includes gift cards that provide access to a specific retailer, affiliated retailers, or retail chain, or alternatively, a designated locale, such as a college campus, or a subway system.

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The Durbin Amendment: What Does the Final Ruling Mean for Prepaid?

Final interchange regulations under the Durbin Amendment of the Dodd-Frank Act will go into effect October 1, changing the rules for interchange transaction fees.  Judith Rinearson, Linda Odom and Courtney Stolz of the Bryan Cave Payments team presented a webinar on August 2, 2011 explaining what the new interchange and routing rules mean for the prepaid industry and how to comply.   A copy of the slides is available online.

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13 Questions to Ask about Durbin Rules and Prepaid Products

After almost a year of debate on whether to unwind the legislation and delay its implementation, the Durbin Amendment to the Dodd-Frank Act will soon be implemented by the Federal Reserve Board’s final rule on debit interchange or “swipe” fees.  Judie Rinearson explains in flow-chart format how the final rule, most of which takes effect October 1, 2011, applies to prepaid card programs.  Her article “The Effect of the Fed’s Final Rule on Your Prepaid Program:  The 13 Questions You Must Ask” was originally published by Paybefore.

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Durbin Amendment Webinar

Durbin Amendment Webinar

July 25, 2011

Authored by: Bryan Cave

Final interchange regulations under the Durbin Amendment of the Dodd Frank Act will go into effect October 1, changing the rules for interchange transaction fees.  The Bryan Cave Payments team will present a live webinar and Q&A session on Tuesday, August 2, 2011 from 2:00 to 3:00 pm EDT explaining what the new interchange and routing rules mean for the prepaid industry and how to comply.

The Durbin Amendment:

What Does the Final Ruling Mean for Prepaid?

You can register for free online. Attendees are encouraged to submit in advance and without attribution, any questions they would like addressed during the webinar.  Please enter your questions when you register.

The Webinar will be presented by Judie Rinearson (Bryan Cave – New York), Linda Odom (Bryan Cave – Washington, D.C.) and Courtney Stolz (Bryan Cave – Washington, D.C.).

CLE credit for this webinar will be available for attendees in California, Georgia, Illinois, New York and Virginia.

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New "Durbin" Interchange and Routing Final Regulations Issued

On June 29, 2011, the Federal Reserve Board approved its final interchange rules, entitled Regulation II, “Debit Card Interchange Fees and Routing,” setting the maximum permissible interchange fee that an issuer may receive for an electronic debit transactions made with debit cards and general use prepaid cards, codes, and other account access devices.

Under the final rules, issuers are permitted to charge a base fee of 21 cents plus 5 basis points (.05%) multiplied by the full value of the transaction, to cover fraud losses.  In addition, a 1 cent per transaction fraud prevention adjustment was also proposed, for those issuers who meet eligibility requirements (such as having fraud prevention and data security policies and procedures in place, which must be updated and certified on an annual basis.)  The fraud prevention adjustment rules are new, and are open for comment through September 30, 2011.

Under the new rules, a covered $50 debit or prepaid transaction would have a total possible interchange fee of  = 23.5¢ [21¢ + 2.5¢ ($50 x .05  /100) + 1¢], and a $500 transaction would have a total possible interchange fee of  = 47¢  [21 ¢ + 25¢ ($500 x.05 /100) + 1¢].   While this is a significant improvement over the original suggested cap of 12¢, it still represents a substantial decrease in interchange revenues for both prepaid and debit card issuers.

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Final Interchange Rules Approved

Final Interchange Rules Approved

June 30, 2011

Authored by: Bryan Cave

Prepaid Industry Gets Some Relief but General Purpose Reloadable Cards Face Unanticipated Restrictions

At a publicly held board meeting on June 29, 2011, the Federal Reserve Board approved its final interchange rule, entitled Regulation II, “Debit Card Interchange Fees and Routing,” setting the maximum permissible swipe fee an issuer may receive for an electronic debit transactions, adopting routing requirements and applying unanticipated new restrictions to General Purpose Reloadable (GPR) cards to take advantage of the interchange cap exemption. In addition—to the relief of the banking industry—the Fed announced that the rules on pricing requirements will go into effect on Oct. 1, 2011, as opposed to July 21 as dictated by the Durbin Amendment.

Under the final rule, issuers are permitted to charge a base fee of 21 cents (representing 80 percent of an issuer’s average transaction cost), plus five basis points on the full value of the transaction to cover fraud losses (representing the average per-transaction fraud loss of the median issuer). The fraud loss recoupment (referred to by the Fed as an “ad valorem” or “according to value” charge) came as a surprise to most and is viewed as a big win for the banking industry. The Fed also issued an interim final rule that would allow issuers to charge an additional fraud prevention adjustment of one cent if the bank meets, and certifies compliance of, certain security standards. The Fed requested comments on whether the one-cent cap should be adjusted.

In addition, the Fed approved rules governing routing and exclusivity, requiring issuers to offer two unaffiliated networks for routing debit transactions.

Perhaps the biggest surprise in the final rule is that GPR cards will not benefit from the interchange cap exclusion if they allow funds to be accessed through means other than the card.

Open Board Meeting

At the board meeting, Chairman Ben Bernanke stated that the interchange rule has been one of its most challenging rulemakings under the Dodd-Frank Act to date. The Fed had to consider myriad players impacted by debit interchange, as demonstrated by the more than 11,000 comment letters the Fed received.

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OCC Issues NPRM on Dodd-Frank Implementation, Preemption

The OCC recently issued a Notice of Proposed Rulemaking (NPRM) on integration of the OTS into the OCC and other Dodd-Frank Act implementation matters, including changes to national bank preemption and the OCC’s visitorial authority. Per Dodd Frank, the OCC will assume responsibility for the ongoing examination, supervision and regulation of federal savings associations on July 21, 2011. 

The NPRM revises OCC rules related to internal agency functions and operations (and integrates references to the OTS and federal thrifts, where applicable), including those related to OCC organization, availability of information under FOIA, release of non-public OCC information and post-employment restrictions for senior examiners. The NPRM also amends the OCC’s assessment fee rule to include federal savings associations and to synchronize payment due dates. In addition, the NPRM implements the Dodd Frank three-year moratorium on changes in control of credit card banks, industrial banks and trust banks, where the change would result in direct or indirect control by a commercial firm. 

Perhaps most significant, however, are the changes made to the OCC regulations governing preemption and the OCC’s visitorial authority. As mandated by Dodd Frank, these changes will: 

  • Eliminate preemption of state law for national bank operating subsidiaries, agents and affiliates.
  • Remove language permitting field preemption (that is, preemption over an entire body of law, even if there is no conflict, because federal law “occupies the field”). 
  • Implement statutory changes made by Dodd Frank as to when state consumer financial laws may be preempted, based in part on the Barnett standard for conflict preemption. 
  • Revise the OCC’s visitorial powers rule to conform to the Supreme Court’s Cuomo decision, recognizing the ability of state attorneys general to bring enforcement actions in court to enforce non-preempted state laws against national banks. 
  • Apply the national bank and national bank subsidiary preemption and visitorial powers standards to federal thrifts and their subsidiaries. (The affected OTS preemption regulations will be repealed.)
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China’s First Efforts at Licensing Prepaid Payment Issuers

Optimism Tempered with Caution

A version of this post also appeared in the June 2011 issue of Paybefore Legal.

The People’s Republic of China has ventured carefully in the area of payment cards. Its first step was launching its national bankcard network, UnionPay, in 2002. From that beginning, the Chinese bankcard industry has grown rapidly. According to UnionPay, by the end of 2006, there were 1.175 billion bankcards: 1.119 billion debit cards and 56 million credit cards.

In the last five years, closed-loop prepaid cards, especially store and phone cards, also have been booming in China. A recent Mercator report, Prepaid Cards in China 2010, indicated overall sales of closed-loop prepaid cards exceeded $200 billion. For example, a category of cards known as payroll and benefit cards, exceeded US$58 billion in sales. These are not the payroll cards we are accustomed to in the United States, but are essentially closed-loop gift cards given at important holidays, replacing traditional gifts of groceries or cash.

According to the Mercator report, open-loop prepaid cards account for less than 0.01 percent of all prepaid cards in China, primarily due to government concerns about confusion between debit, credit and prepaid. In fact, banks have been forbidden from issuing prepaid cards since 2006.

But, change is coming. For the first time, China has issued regulations that permit nonbanks to issue open-loop prepaid cards, subject to stringent licensing requirements. These new regulations, which appear to be somewhat similar to U.S. money transmitter licensing laws, are summarized below.

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Promotional Certificates: Avoiding Legal Traps

A version of this post also appeared in the 2nd Quarter 2011 issue of Franchise Law News.

Many retailers are interested in building up new business by offering a deeply discounted “Groupon-like” gift certificate program. These programs market to local residents that, for example, for $25 they can get $50 worth of food at Fred’s Pub. To be effective, the discounted certificate almost always has a short expiration date, a few weeks or months.

That is the problem. Sure, a short expiration date makes perfect sense from a marketing perspective. But these are different from the coupons found in your Sunday paper, because the consumer has to pay for them. That is why, although these programs are highly popular, there has been a spate of class-action lawsuits claiming that the expiration dates violate applicable laws.

The good news is that there is a way to offer a discounted Groupon-like gift certificate program without getting on the wrong side of the law. Here’s how.

Issues Under Federal Law

In 2009, Congress passed the CARD Act which, among other things, regulates gift cards and gift certificates. Under the Act, both open and closed-loop gift certificates and gift cards are prohibited from expiring before five years from their date of issuance.

However, there is an important exclusion for loyalty, award, and promotional cards (“promotional cards”). Expiration dates are permitted on promotional cards—provided that 1) the fact that it is a “promotional card” and 2) the expiration date are both clearly disclosed on the front of the card or certificate.

The tricky part is making sure your discounted certificate program falls within the definition of “promotional programs.” To meet the definition, the discounted certificate must be issued to a consumer “in connection with a loyalty, award, or promotional program.” Make
sure you put appropriate language in your contracts, as well as on your advertising and marketing materials that confirms the discounted certificate is offered in connection with a promotional, loyalty, or award program.

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Senate Defeats Bill to Delay Interchange Fee Caps

After a long and divisive lobbying fight, retailers defeated the banking industry Wednesday as the Senate narrowly defeated legislation to delay new caps on debit-card swipe fees.

The legislation was offered by Sens. Jon Tester (D-Mont.) and Bob Corker (R-Tenn.) and failed on a 54-45 vote, falling just six votes shy of the 60 needed for passage and clearing the way for a provision in last year’s Dodd-Frank Wall Street reform law to take effect July 21.

The provision, often referred to as the “Durbin Interchange Amendment” required the Federal Reserve to establish fair and reasonable interchange fees for many debt and prepaid card transactions.  Last Fall, the Federal Reserve proposed new rules which (among other things) would limit to 12 cents per transaction the fee that large banks (with more than $10 billion in assets) can charge merchants every time a consumer uses a debit card or a prepaid gift card.  These proposed rules garnered significant critcism and final rules, which are now overdue from the Federal Reserve, are expected shortly.

Senators Tester and Corker initially proposed delaying the Durbin amendment from taking effect for 24 months. The final version of the Tester-Corker plan was to cut the delay in half to 12 months and called for a six-month study of the costs associated with debit transactions and their impact on consumers and small, community banks.

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