Discussion Paper

Insolvency risk in the network-branded prepaid-card value chain

Abstract: The value chain for network-branded prepaid cards involves more parties than those commonly present in credit- or debit-card issuing arrangements: the merchant acquirer, processors, a payment network, and a card-issuing bank. These additional participants may include a program manager, a distributor, and a seller. Since a number of independent businesses make up the chain, each one, as well as cardholding consumers, could be exposed to losses resulting from the insolvency of another party in the value chain. This risk is both real and manageable, as illustrated by two recent incidents involving network-branded prepaid cards: the failures of Silverton Bank, N.A.. and Sprinbok Services, Inc. The Payment Cards Center of the Federal Reserve Bank of Philadelphia hosted a workshop of March 17, 2011, to examine the implications of insolvency in the network-branded prepaid-card value chains, to review how market participants have responded to this risk, and to discuss controls the industry has developed to mitigate and address these challenges, Kirsten Trusko, president of the Network Branded Prepaid Card Association (NBPCA); Terry Maher, partner at Baird Holm LLP and general counsel to the NBPCA; Jeremy Kuiper, managing director of the Bancorp Bank; and Ted Martinez, head of Visa?s North America credit settlement risk team, led the workshop. This paper summarizes the information presented at the workshop, including the ways in which consumers and businesses are protected from the insolvency of the issuing bank or a key participant. In addition, this paper highlights practices that have been developed in the industry to mitigate this risk.

Keywords: Electronic funds transfers;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Consumer Finance Institute discussion papers

Publication Date: 2011

Number: 11-05