Is This a Prepaid Account?
Senior Compliance Consultant Jon Tavares answers the question that’s been on every compliance officer’s mind: Is this a Prepaid Account?
Is this a prepaid account? With the Prepaid Rule becoming effective in April, this is the most pressing question on a compliance officer’s mind. Well, you’re in luck! We’ve got the answer covered.
Prepaid Accounts
A prepaid account is any of the following:
1. Any account marketed or labeled as “prepaid” that is redeemable at multiple, unaffiliated merchants for goods or services, at ATMs or for P2P transfers
2. Any account issued on a prepaid basis in a specific amount – or not issued on a prepaid basis but capable of being loaded with funds thereafter – with the primary function of conducting transfers with multiple, unaffiliated merchants for goods and services at ATMs or for P2P transfers that is not a checking, share draft or NOW account
3. A payroll card account
4. A government benefit account
“Marketed or labeled as prepaid” means marketed or promoted using the term “prepaid.” This includes any accounts that include “prepaid” on the access device, packaging material or display case as well as any advertisement or publication to promote the account. The financial institution, its service provider, a program manager or a payment network can market or label the account as prepaid.
“Issued on a prepaid basis” means the account is loaded with funds when first provided for consumer use. “Capable of being loaded with funds” describes a card on which the consumer or a third party may load funds subsequent to issuance. A prepaid account must be able to hold funds; it does not include pass-through vehicles such as a digital wallet. A product that can store funds until a consumer designates a destination is a prepaid account. An account does not need to be reloadable to be prepaid. An account that provides these capabilities only incidentally, such as a brokerage or savings account, is not a prepaid account.
Payroll Card Account
A payroll card account is any account directly or indirectly established through an employer that allows electronic fund transfers of a consumer’s wages, salary or other employee compensation (such as commissions), made on a recurring basis. An employer, a third-party payroll processor, a depository institution or any other person can operate or manage a payroll card account.
A payroll card account does not include any of the following:
1. An account used solely to distribute incentive-based compensation other than commissions, such as bonuses, which are unlikely to be the consumer’s primary source of salary or other compensation
2. An account used solely to make distributions unrelated to compensation, such as petty cash reimbursements or travel payments
3. An account used in isolated instances to which an employer does not make recurring payments, such as providing final payment or in emergency situations where other payment methods are unavailable. While these accounts are not “payroll card accounts,” they could still be “prepaid accounts” if the other conditions of the definition apply. If an account is a payroll card account, all transactions are covered, including a particular transaction involving a bonus, other incentive-based compensation, reimbursement or a transfer that does not constitute a transfer of wages, salary or other employee compensation.
Government Benefit Account
A government benefit account is established by a government agency for distributing government benefits to a consumer electronically, such as through automated teller machines or point-of-sale terminals, but does not include accounts for distributing needs-tested benefits in a program established under state or local law or administered by a state or local agency.
These Are Not Prepaid Accounts
Except for accounts that meet the definition of payroll card accounts and government benefit account, a prepaid does not include any of the following:
1. An account loaded with funds from a health savings account, flexible spending arrangement, medical savings account, health reimbursement arrangement, dependent care assistance program or transit/parking reimbursement arrangement
2. An account established by a third party (directly or indirectly) loaded only with qualified disaster relief payments
3. P2P functionality of an account established by the U.S. government whose primary function is to conduct closed-loop transactions on U.S. military installations, vessels or similar government facilities
4. An account established for distributing needs-tested benefits in a program established under state or local law or administered by a state or local agency
5. A gift certificate; store gift card; general-use prepaid card or loyalty, award or promotional gift card. Excludes any card, code or other device that is:
- Used solely for telephone services
- Reloadable and not marketed or labeled as a gift card of gift certificate
- Not marketed to the general public
- Issued in paper form only
- Redeemable solely for admission to events or venues at a particular or affiliated location(s), to obtain goods or services in conjunction with admission to such venues or events, or at specific locations affiliated with and in geographic proximity to the event or venue
If any of your accounts meet the definition of a prepaid account, the account will be treated as a “debit card” for purposes of Regulation E. Some prepaid accounts will also be “hybrid prepaid-credit cards” subject to Regulation Z. A hybrid prepaid-credit card is a prepaid card that can access credit from a separate credit feature or a credit feature structured as a negative balance on the asset feature of a prepaid account. A hybrid prepaid-credit card, with respect to the credit features, is a credit card for purposes of Regulation Z.
In my next few articles, we will discuss the various requirements of the Prepaid Rule, including its purpose, disclosure requirements, error resolution, modified liability and hybrid prepaid-credit cards.