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Applying CIP Requirements to Holders of Prepaid Cards

By: Christine Schreiner


Prepaid cards have become widely used by individuals and companies, as well as local, state, and federal governments. Individuals may use prepaid cards to buy products, pay for services, withdraw cash from ATMs, and receive or transfer funds to another cardholder. Companies may use prepaid cards to provide employee salary and other compensation benefits such as pre-tax flexible spending or healthcare expenses. Governments may use prepaid cards to distribute government benefits or tax refunds. The agencies (FRB, FDIC, NCUA, OCC, FinCEN) issued the Interagency Guidance to Issuing Banks on Applying Customer Identification Program Requirements to Holders of Prepaid Cards earlier this year to clarify how and when a financial institution should apply Customer Information Procedures (CIP) as defined by the Bank Secrecy Act to prepaid cardholders.


Since 2003, financial institutions have been responsible for obtaining information on each customer who opens an account, in particular, name, address, date of birth, and tax identification number. In regards to CIP requirements for prepaid cards, the institution must first determine if an account relationship has been created. If an account is created, the institution must then verify the identity of the customer.


An account is defined in the CIP rule as “a formal banking relationship established to provide or engage in services, dealings, or other financial transactions, including a deposit account, a transaction or asset account, a credit account or other extension of credit.” An account also includes “a relationship established to provide a safety deposit box or other safekeeping services or to provide cash management, custodian, or trust services.” An account does not include “products and services for which a formal banking relationship is not generally established with a person, such as check cashing, wire transfer, or the sale of a check or money order.”


For purposes of the CIP rule, prepaid cards should be treated as accounts when they provide a cardholder with (1) the ability to reload funds similar to the ability to add funds to a traditional deposit account or (2) the ability to access credit or overdraft features where the card permits withdrawals in excess of the card balance.


Cardholders of prepaid cards that allow the ability to reload funds or access credit or overdraft features are considered financial institution customers regardless of whether they obtained the card through an intermediary who used a pooled account with the institution to fund the cards. The third party intermediaries are considered agents of the financial institution, and not customers. Use of a third party program manager does not absolve the institution from the CIP requirements. Third party program managers are only considered customers of the institution when the prepaid cards they issue do not have either of the identifiable features: ability to reload funds or ability to access credit or overdraft features.


Contracts between issuing banks and third party program managers should clearly define expectations, duties, and responsibilities of each party.

Specifically at a minimum, contracts should:


  • outline CIP obligations of the parties;
  • ensure the right of issuing institutions to transfer, store, or otherwise obtain immediate access to all CIP information collected by the third party program managers on cardholders;
  • provide for issuing institutions right to audit third party program managers and to monitor their performance; and
  • indicate that the relevant regulatory body of the financial institution has the right to examine the third party program manager.


Based on the interagency guidance, the onus lies on the financial institution to determine if the cardholder has created an account, and is, therefore, considered a customer of the institution.


The most common prepaid cards include:


  • Payroll cards are issued most often to provide an employee’s wages, salary, bonuses, travel reimbursements or other such compensations. If the employer is the only one who may deposit funds into the card account, the employer should be considered the institution’s customer. If the employee can access credit or reload the card from other sources than the employer, the employee should be considered the customer.
  • Government benefit cards distribute government benefits and other payments. If the card only permits government funds to be loaded to the card and does not provide access to credit, no customer relationship for the purpose of the CIP rule is established since the definition of a customer exempts governmental entities.
  • Health Savings accounts are established by an employee to pay or reimburse medical reimbursements.  Because the employee establishes the account, the employee is the financial institution’s customer.
  • Flexible Spending accounts are established by an employer and the employer, therefore, is the financial institution’s customer.

If your institution offers prepaid cards, ensure that your CIP policy and procedures are updated to reflect the interagency guidance.


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