Fed’s Interchange and Routing FAQs Throw Prepaid in a Tizzy (March 2013)
The Federal Reserve Board (Fed) quietly released changes to its FAQs on Reg. II’s restrictions on debit card interchange fees and routing.
Five new FAQs were added and one existing FAQ was revised. Changes in two areas directly affect prepaid cards: the exemption for “general use prepaid cards” and the requirement for adding a second routing network on existing cards (which, for prepaid cards, will become effective on April 1, 2013).
The Fed’s FAQs are not intended to be “official interpretations,” but are considered useful “illustrations.” Often FAQs are issued in response to recurring questions received by the Fed. Although the FAQs do not have the force of a formal interpretation, they should be given serious weight when making a determination regarding compliance with Reg II.
General Use Prepaid Card Exemption
The “interchange” portion of Reg. II has an important exemption for certain general use (non-gift) prepaid cards, provided, among other things, the card is the “sole means” of access to the funds and does not access the cardholder’s bank or similar account. Changes and clarifications regarding the “general use prepaid card” exemption include:
FAQ 2 in this section was revised to clarify that the exemption still applies if a cardholder uses a prepaid card number on a merchant’s Website to make payments. But the Fed cautions, referencing FAQ 7, if the cardholder uses the card number or associated account number together with a routing/transit number to make payments via ACH, the exemption no longer would apply.
New FAQ 7 clarifies that receipt of loads onto prepaid cards via ACH does not violate the “sole means of access” limitation and does not make a general use prepaid card otherwise ineligible for the exemption.
This FAQ also addresses a consumer’s use of ACH routing information (obtained to make card loads via ACH) to make payments from a prepaid card account. It indicates that the card does not lose the exemption, provided the issuer (1) conspicuously discloses that use of the routing/transit numbers to make ACH payments is prohibited and (2) if the issuer becomes of aware of such use, it takes further action to prevent the cardholder from using the routing/transit number to make a payment through a “non-card means (e.g., an ACH debit transaction).”
New FAQ 8 clarifies that a prepaid cardholder can present the card at the bank branch “of the issuer” to obtain cash from the underlying card account without losing the exemption, provided the cardholder is the person receiving the cash. The FAQ does not cover whether the exemption remains if the cardholder can present the card to obtain cash at a different bank or from a retailer or other third party. Perhaps these uses are not considered “non-card means,” although either method would seem to be using the “card” as the source of funds.
New FAQs 9 and 10 affect e-wallets and other potentially “decoupled debit” arrangements, as well as some traditional prepaid programs. FAQ 9 indicates that if a prepaid card issuer settles purchases made with the card by debiting a separate account (such as the cardholder’s DDA/bank account), then the program is not eligible for the exemption because the card is used to access an account “held by or for the benefit of the cardholder.”
Similarly, FAQ 10 indicates that “automatic refills” on prepaid cards, that are set up “under standing instructions from the cardholder” to be reloaded from the cardholder’s bank account (for example, a card that is automatically reloaded if the prepaid card balance falls below a set amount), also would not be eligible for the exemption because the prepaid card is used to access an account “held by or for the benefit of the cardholder.”
Network Exclusivity and Routing
Changes and clarifications regarding the network exclusivity and routing provisions, made in a new FAQ 2 in this section, are likely to create significant headaches for issuers of nonreloadable gift cards, reward cards and, perhaps, other types of cards such as health care cards. This position was not anticipated by many prepaid issuers, which, instead, developed prepaid products that permitted PIN activation at a later date. The FAQ indicates that the new Reg II routing restrictions—effective April 1, 2013—require cards (including those that traditionally have been solely signature-based) to add a second independent routing network. The new FAQ clarifies that if the second network is a PIN network, then a PIN must be issued at the time the card is purchased or activated. It is not sufficient simply to have instructions for the cardholders on how to obtain a PIN—even if the instructions are clear, conspicuous and easy to follow.
Given the extremely short time frame before the effective date of these routings restrictions, many gift card issuers (which already have narrower margins because they are not exempt from the Durbin interchange restrictions) likely will have significant problems complying on a timely basis. This requirement also undoubtedly will significantly increase the cost of issuing and maintaining open-loop gift cards.