05 March 2014
Various states are starting to pay close attention to the security of their card-based payment systems in the wake of recent data breaches. In a bit of a return to the past, they are instead sending tax returns as checks to recipients instead of depositing funds into prepaid card accounts.
The Minnesota Department of Revenue, for example, reportedly is indefinitely postponing its conversion of paper checks to prepaid card accounts. This came after state lawmakers last spring gave the department the OK to move to allow refunds to be deposited into debit card accounts. The recent theft of payment card data at Target was the chief reason the department postponed the conversion in January.
In a similar abrupt move, Connecticut’s tax department in December decided to immediately suspend its tax-refund debit card program and issue paper checks instead, not because of a breach at a retailer, but because of a computer data breach in a systems handled by JPMorgan Chase. The state’s tax commissioner reportedly was not please with the speed with which Chase provided him with information about the breach.
System fragile, but growth continues
Such decisions are a testament to just how fragile payments systems are and how quickly years of planning to convert to electronic-based systems can turn on a dime and revert to older, paper-based systems. And while state tax-refund systems appear to be the most reactive to the recent breaches, various key players in the space appear not to be distracted, as least publicly.
During a recent call with analysts to discuss quarterly earnings, M. Troy Woods, TSYS president and chief operating officer, noted that NetSpend completed its first successful year offering its prepaid card as an option for saving tax refunds to the millions of consumers who use TurboTax software. “We exited the year with an established base of active debit cardholders, and were off to a very strong start for 2014 tax season,” he said.
Woods, who didn’t mention the breaches in his NetSpend discussion, went on to say that TSYS continues to get inquiries from banks interested in NetSpend prepaid cards, with cross-selling primarily occurring in North America.
Opportunities for prepaid still growing
Indeed, even with prepaid competition heating up, other prepaid specialists, such as Green Dot, still see opportunities for growth. Companies such as American Express with Serve and Chase with Liquid offer alternatives, but Green Dot says it is still thriving nonetheless.
“In one large retailer where we have third-party sales data, Green Dot is outselling Serve by an 11:1 margin for the combined December and January to-date period,” Steve Streit, Green Dot CEO, told analysts during a recent quarterly earnings call. “To be sure, American Express is a terrific company with a very strong brand and loyal base of financially well-heeled customers. When it comes to serving America's wealthiest customers with world-class charge cards and credit cards, American Express is tops. But when it comes to serving America's low- and moderate-income families with high-quality, low-cost prepaid cards, American Express is no Green Dot.”
Such comments suggest that, while some states have concerns about applying tax refunds to prepaid accounts, other similar conversions from paper to plastic, such as to debit card payroll programs or the use of general purpose prepaid cards instead of cash, appear to be less affected, and that gives prepaid program managers some optimism.
Indeed, while the security challenges of a provider create concerns for some, “many program manager's are seeing an increase in opportunities from those employers who have come to depend on the efficiency and savings that prepaid cards offer for corporate disbursements such as payroll, accounts payable and incentives," Peter Mahr, president of CoreCard Processing, an Atlanta based prepaid card processor.
Visa pushes to reduce prepaid fraud
To help keep prepaid card vulnerability to a minimum, and to help keep prepaid opportunities viable, Visa last week said it had completed technical development of a new service designed to detect and prevent fraud schemes that target the use of prepaid cards. The Visa Prepaid Clearinghouse Service is a centralized database that allows issuers, processors and prepaid program managers to share prepaid card data. This information could include enrollments, load-funding, suspected fraudulent information and previously reported fraud on existing card accounts.
By participating in the service, participants will have access to a holistic view of prepaid cards across the industry, thus enabling them to better detect and protect customers from fraud more efficiently and effectively. All U.S. Visa-issuing banks and card-program managers will be required to report information into the clearinghouse, though the system also is capable of supporting multiple network brands. All Visa prepaid-issuing financial institutions and program managers will be required to report into the system by June 2015.