Prepaid card Customer Identification Program requirements are becoming an important compliance consideration for banks, credit unions, and other financial institutions that issue prepaid products. Regulatory guidance clarifies when prepaid cardholders should be treated as accountholders and therefore be subject to the same identity verification requirements applied to other banking customers.
The distinction largely depends on the capabilities of the prepaid card, including whether cardholders can reload funds or access credit. Financial institutions must also consider prepaid programs operated through third-party program managers, making clear policies and reliable customer identification procedures essential.
The banking agencies have released guidance about when banks need to put prepaid card holders through the full Customer Identification Process required for all accountholders.
When Prepaid Cards Become Accounts
The guidance applies to banks, savings associations, credit unions, and U.S. branches and agencies of foreign banks (collectively “banks”). The guidance clarifies that a bank’s CIP should apply to the holders of certain prepaid cards issued by the institution as well as holders of such prepaid cards purchased under arrangements with third-party program managers that sell, distribute, promote, or market the prepaid cards on the bank’s behalf. The guidance describes when, in accordance with the CIP rule, the bank should obtain information sufficient to reasonably verify the identity of the cardholder, including at a minimum, obtaining the name, date of birth, address, and identification number, such as the Taxpayer Identification Number of the cardholder.
The guidance defines prepaid cards that give the cardholder the ability to reload funds or access to credit as accounts, and so banks must collect name, date of birth, address, and an identification number from individual cardholders.
Prepaid Programs Excluded From CIP Requirements
Programs that are excluded include payroll cards where only the employer can load funds on the cards, government benefit cards, and flexible spending accounts where only the employer can load funds.
Uncertainty Around Credit and Negative Balances
The guidance does not specify whether or not the ability to for cards to occasionally and inadvertently go negative counts as an extension of credit. In that case, some of the exemptions, such as the one for payroll cards may not apply. Batch processing and forced transactions could cause a card that ordinarily should not go negative top become negative.
It seems that issuing banks and credit unions would be wise to ensure that prepaid program managers gather CIP information on all cardholders due to the ambiguities around this point. Additionally, given that FDIC pass-through insurance relies upon knowing how much is held for each cardholder, knowing about each individual cardholder would help with the assertion that funds on deposit for prepaid cards are FDIC insured.
The guidance makes clear that prepaid products cannot always be treated as anonymous or limited-purpose payment instruments. When a prepaid card allows the cardholder to reload funds or access credit, the relationship may qualify as an account and trigger prepaid card Customer Identification Program requirements, including collecting information necessary to verify the cardholder’s identity.
At the same time, questions remain around situations in which a prepaid card unintentionally develops a negative balance. Batch processing, forced transactions, or other circumstances could potentially create uncertainty about whether credit has been extended and whether an otherwise exempt prepaid program remains outside the CIP requirements.
For issuing banks and credit unions, these ambiguities make coordination with third-party prepaid program managers particularly important. Institutions should understand what customer information is collected, how identities are verified, and whether program features could cause a prepaid product to fall within CIP requirements.
Collecting sufficient information about individual cardholders may also support other aspects of prepaid account administration, including determining the amounts held on behalf of individual customers for purposes of FDIC pass-through deposit insurance. As prepaid programs continue to evolve, financial institutions will need to carefully evaluate product features and account relationships to determine when customer identification requirements apply.
Overview by Ben Jackson, Director, Prepaid Advisory Service at Mercator Advisory Group
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