News

Study examines prepaid card fraud and risk controls in the US

November 14, 2013

New research from Mercator Advisory Group examines fraud risk and best practice for fraud prevention in prepaid card programs. The report, "Prepaid Card Fraud and Risk Controls in the United States," examines the methods criminals use to commit fraud, money laundering, and other types of crime through prepaid programs and countermeasures to prevent these methods.

The first section of the study draws from recently reported fraud and government statistics to reveal the size and scope of the prepaid fraud problem. It also reveals why crimes that involve prepaid cards are not due to fundamental flaws with the product type itself.

The second section of the report examines regulatory responses to fraud. The report discusses new regulations that have been written and explains why regulating prepaid cards is not always the best response to crime.

The third section of the report examines best practices for combating prepaid card fraud and other related crimes. The report discusses preventive measures that can be taken throughout the prepaid value chain to deter criminals.

The report lists recommended reading and describes how several processors help manage fraud risks for issuers and program managers.

"Prepaid fraud is a serious but manageable problem as long as all the members of the prepaid value chain work together," said Ben Jackson, senior analyst for the Mercator Advisory Group prepaid advisory service and coauthor of the report. "There is nothing inherent to prepaid that makes it more or less risky than other financial products."

Issues addressed in the report:

fraud, money laundering and other criminal activities plague prepaid card providers, but the problem is not inherent to the payment type;
the size of open-loop prepaid fraud is relatively small when compared with debit fraud, but it remains an important issue;
prepaid fraud and criminal activity can be divided into fraudulent funding, fraudulent usage, and money laundering/criminal activity;
banking regulators have extended their examination scope to prevent criminal activity on prepaid; and
existing best practices can make prepaid fraud a manageable problem, but providers must constantly work to stay ahead of criminals.

One of four exhibits in the 34-page report:

prepaid card fraud study