he road to riches is lined with plastic cards according to the industry buzz. Not the run of the mill, ordinary, average card Association-branded credit and debit cards. Instead, cards loaded with pre-set sums of money are paving the golden road.

The market for the cards, comprising a segment known as stored value or prepaid, is booming and provides plenty of opportunities for a wide range of people and organizations involved in it.

Within the segment are closed loop cards, which merchants issue to customers for use specifically at a particular establishment. These are gift cards. They have one purpose and are increasingly popular among gift givers and receivers alike for their one-size-fits-all convenience.

Then there are the open loop products, or stored value cards (SVCs), which incorporate a growing number of functionalities. These are payroll and other reloadable cards consumers purchase for a variety of reasons.

With their increasing popularity, and with more types of prepaid cards now reaching new markets, a number of issues surround the products and affect anyone who provides, processes, purchases or uses SVCs.

Prepaid payment cards of all kinds might line the road to riches, but before you sell the farm and load the proceeds onto a stored value product, take some important things into consideration.

Broadening Financial Horizons

The nature of prepaid products is expanding to give consumers a much wider range of options beyond simply making purchases at their favorite stores.

Consumers use prepaid cards because of the convenience and cost savings they provide. SVCs make it easier for people to manage their funds, pay bills, make purchases and to transfer money; they also use them for a variety of "top-up" services.

SVCs now provide users not only with a variety of transactional tools, they are also beginning to bring features typically associated with traditional bank accounts to "unbanked" and "underbanked" consumers.

Taking it one step further, some people say SVCs could, and should, serve as credit- and asset-building tools, with information on usage reported to credit bureaus in much the same way data from other accounts are, to help unbanked consumers gain financial footholds.

As these functions become reality, questions arise: How to define a bank account or a deposit; whether funds loaded on an SVC should be federally insured or to whom the coverage would apply; and whether all issuers of SVCs should be considered financial institutions.

These issues serve as fodder for discussions among regulators, providers and industry observers.

They're trying to figure out where to draw the line between retail grocery or convenience locations where customers buy and reload SVCs, and financial institutions that offer prepaid products including long distance and wireless service at their branches.

A Prepaid Package That Does Fit All

SVCs give a large portion of the population access to financial services that they otherwise might not be able to enjoy, and financial institutions are just beginning to discover that the cards provide them with access to a large, previously untapped customer base.

New York Community Bank (NYCB) is one of the first financial institutions in the country to offer its customers a range of prepaid products at its 143 branches throughout New York City, Long Island and northern New Jersey.

The program offers a full suite of prepaid products and services that includes a Visa-branded gift card; MasterCard-branded stored value debit cards; a payroll card; credit card cash advance; and prepaid wireless and long distance. The NYCB program is unique because it has packaged a number of products and has taken a one-stop approach to making them available to customers.

All of the card product values are loaded via Ingenico's Elite 712 terminal, which the branches also use to process credit and debit transactions.

NYCB introduced its program in December 2004 in conjunction with payment processing provider TransFirst, and so far, results have been overwhelmingly positive, according to Bob DuFort, Senior Vice President for NYCB.

"We introduced the gift cards prior to the holidays," he said. "Without a major ad campaign, the cards sold way ahead of our expectations."

NYCB is the country's fourth largest thrift with assets of $24 billion. As its name suggests, it has a strong commitment to the communities in which its branches are located.

The neighborhoods that NYCB serves are financially and ethnically diverse, DuFort said, creating the need for marketing the same prepaid products to very different target audiences: as a primary payment tool, or as a convenience tool for traveling or managing a college student's finances, for example.

However they use them, the idea behind offering the prepaid products is to not only give existing customers another service, but also to get the unbanked, who are potential new customers, in the door as well.

One day when these people are ready to move to traditional bank products including checking or savings accounts, the relationship will already exist with NYCB, DuFort said. They're using the SVCs to build trust.

"These customers can depend on the safety and soundness in banking," DuFort said. "We don't know whether they've applied for checking accounts or credit cards.

"If they don't wish to, we'll have this product available for them to utilize. If they wish to move into that area, we'll open the way for them to do that."

DuFort said assistance from NYCB might include the development of a prepaid product that helps customers build credit. "NYCB is structured to be community oriented and focused on local neighborhoods.

"We do our best to serve the various markets within the community. Moving forward, we see [the credit-building product] as a natural extension of this."

Banks as Retailers?

It's no surprise that financial institutions have long used various products to entice customers to bank with them. But with the introduction of stored value products at the branch level, does that put banks in direct competition with retailers?

"Competition with non-bank retail locations is not the issue," DuFort said. "It's not an issue of the market forcing us to be in that area, but rather, we're following up on our promise to serve our community.

"The issue here is making it convenient for the consumer. The prepaid products are complementary to the services we provide in the local communities," he said.

"Financial instruments are being pushed at c-stores, check cashers and gas stations," said Randy Oveson, TransFirst's Director of Business Development for Prepaid. "Our program is kind of a flip-flop of that.

"We're giving the banks financial instruments to bring into their fold the unbanked and underbanked customers."

Oveson noted the benefits that stored value products have over check cashing businesses, too. "It's a convenience to the buyer. It's cheaper, and it's a safer way to do it; there's no exchange of dollars with a reloadable card."

The Center for Financial Services Innovation (CFSI), based in Chicago, promotes new ways to help underbanked consumers reach financial prosperity.

The organization does this by providing funding and resources, enabling partnerships, and developing and distributing authoritative information on how to respond to the needs of the underbanked profitably and responsibly.

CFSI published a research paper on stored value products in July 2004. According to Executive Director Jennifer Tescher, the changing nature of the business relationships involved in stored value is cause for scrutiny.

"We're beginning to look at this, at banks as retailers and at retailers selling financial tools," she said. "The underbanked are now able to access financial services at a broader range of locations, and this is changing the definitions of how we think of financial services: What is an account? What is a deposit? Where do people go to access financial services?"

CFSI's Senior Analyst Katy Jacob, who authored the paper on prepaid products, said that among SVCs, gift cards are in a class by themselves and create different issues from a consumer standpoint, as well as for how the cards are set up and used.

As far as reloadable prepaid programs are concerned, she said that from a regulatory standpoint things are "really up in the air right now." And as banks and financial institutions become more enmeshed in promoting SVCs, deciding the rules will become more crucial.

"Federal Deposit Insurance Corporation (FDIC) deposit insurance, when is it a deposit, who is covered, and related Regulation E [the automated clearing house rule covering electronic fund transfers] decisions around this are clearly out for comment right now," Jacob said.

Building Credit Through Prepaid?

Another big question: If SVCs include asset- and credit-building components, does that change the nature of the products and take them from a simple transactional tool to a more complex credit-based one?

Part of the challenge is packaging the information from stored value products for the credit bureaus in a way that's equivalent to other financial information.

There's really no way to translate it and currently nowhere to put it because technically prepaid products are not bank accounts, and the loaded funds don't count as deposits.

But Jacob and Tescher said credit reporting companies are increasingly more interested in finding ways to incorporate some of the data on SVCs in their systems. For instance, this could include reporting the monthly maintenance fees for keeping some cards open and reloaded as a monthly bill paid on time.

One company, indiGOCARD LP of Fort Worth, Texas, offers a prepaid MasterCard-branded debit card. The company is unique among others in the industry for several reasons, according to Daniel Hines, President and General Partner of indiGOCARD.

One is its fee structure (it charges a flat $9 monthly maintenance fee and says that all transaction fees on its end, including ATM fees, are free).

Another is that each card is tied to an individual, FDIC-insured demand deposit account in the cardholder's name. Funds for other cards receive FDIC coverage through placement in pooled accounts.

"Customers enjoy the highest level of protection against fraud and unauthorized transactions, as well as the same customer service features that typical bank customers receive," Hines said.

The company offers cardholders an overdraft savings protection program, where funds are segmented into a "wallet"; these savings accounts can be referenced on credit applications.

Hines said indiGOCARD hopes to introduce a program in conjuction with credit bureau Experian that will constitute a more reliable method to report a customer's information to reflect positively on a credit report.

"We will be looking primarily at recurring income to the cardholder's account and the various types of recurring payments, such as rent and utilities," he said.

"This program, hopefully, will be fully tested and ready to implement toward the end of 2005."

Customers in all 50 states and across all demographics use indiGOCARD's products. The cards are available on the Internet through payment services including PayPal or Yahoo Funds Transfer, as well as from retailer locations; Hines said most of the cards are funded through customer direct deposits.

How to Regulate It?

Prepaid cards are a relatively new segment of the payments industry, and some experts say that even though there haven't been any problems yet with companies closing down or consumers losing access to funds, the goal is to prevent that from happening in the future.

Then there are the issues regarding fees associated with most prepaid products. Several states have already enacted legislation dealing specifically with closed loop gift cards intended to protect consumers from losing card funds through inactivity or monthly fees.

But with payday lending and check cashing businesses coming under fire, this could be a fortuitous time for the prepaid industry.

We will cover specific regulatory issues behind the stored value product market in the next issue of The Green Sheet.

Applying Regulation E and other banking regulations, including FDIC coverage, to prepaid cards could have far-reaching implications for the way these products are marketed, sold, used and processed.

Other considerations include compliance with USA PATRIOT Act and card Association rules. Stay tuned.