Applying Customer Identity Program Requirements to Prepaid Cards

August 1, 2016 | Article

Prepaid cards have a variety of formats and uses. Many are non-reloadable, whereas the majority of prepaid cards have the ability to be reloaded and used again. Examples of these cards include reloadable gift-cards, reloadable cards purchased in stores for use online or as a credit card substitute, government benefit cards and health care cards. The Financial Crimes Enforcement Network (FinCEN), has begun to regulate the issuance of reloadable cards issued by financial institutions via the USA PATRIOT Act.

What Is an Account?
The customer identification program, or CIP, is a provision of the USA PATRIOT Act and deems that all “accounts” must be opened only after obtaining a name, address, date of birth and identification number for each potential customer. They must also follow the identity verification procedures similar to all other deposit or credit accounts. Also specific account recordkeeping and notice requirements must be followed. However, when applying a product to the CIP rule, the first question to ask is what constitutes an account? An account is defined by the CIP rule as “a formal banking relationship established to provide or engage in services, dealings, or other financial transactions, including a deposit account, transaction or asset account, a credit account or other extension of credit.” So which prepaid cards are accounts and which are not? It all boils down to whether or not the card is reloadable. When a card is not reloadable, that transaction is considered a one-time transaction that does not constitute an ongoing relationship with the individual. When a card is reloadable, it is then considered an account and the CIP rule must be followed.

Who Is the Customer?
There are varying types of reloadable cards that a bank may provide a customer. They can be issued via bankers or tellers within a branch, sold online or via the mail. Some financial institutions that provide merchant services to small or other businesses also provide a gift card or reloadable card service to those businesses. This makes that business an agent for the bank, yet each individual customer of that agent would still be considered a customer of the bank. This poses a problem. When a business issues a reloadable card to one of their customers, how does the financial institution ensure that the CIP rule is being followed to the highest standards? In such cases, for the smaller institution, a closed-loop non-reloadable gift card service is typically desired. This can help forego the need to record and verify each individual customer of that business. The final example is that of businesses who issue prepaid cards to employees or agents of that business. In the past, the business was considered the customer themselves, whereas now each individual cardholder operating on behalf of the business would need to be identified via the CIP rule.

The Benefit of CIP on Prepaid Cards
With these changes, however, many threats can be minimized. The limits on reloadable prepaid cards, in addition to the CIP rule, can help fight the funding of terrorism, money laundering and other financial crimes. It is crucial that these changes be implemented in order to help FinCEN mitigate these risks.

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