Stored Value Cards: A Compliance Guide

Stored value cards (SVCs), also known as prepaid cards or gift cards, have become ubiquitous in modern commerce. From coffee shops to retail giants, they offer a convenient payment method for consumers. However, beneath the surface lies a complex web of regulations designed to protect consumers and prevent financial crimes. This guide provides a comprehensive overview of stored value card compliance, covering key regulatory requirements, consumer protections, and best practices for businesses.

Key Takeaway 1Regulatory Landscape The regulatory landscape for stored value cards is multifaceted, involving federal laws like the Bank Secrecy Act (BSA) and state-level gift card laws.

Key Takeaway 2Consumer Protections Regulations aim to protect consumers from hidden fees, dormancy issues, and unauthorized use of stored value.

Key Takeaway 3BSA/AML Compliance Businesses issuing or accepting stored value cards must comply with Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations, including KYC verification and transaction monitoring.

Key Takeaway 4Evolving Regulations The rules governing stored value cards are constantly evolving; staying informed about changes is crucial for maintaining compliance.

What are Stored Value Cards?

A stored value card represents prepaid monetary value. Unlike credit or debit cards linked to a bank account, SVCs are loaded with a specific amount of money and can be used to purchase goods and services at participating merchants. They come in various forms, including:

• Closed-loop cards: Redeemable only at the issuing merchant (e.g., a coffee shop gift card).
• Open-loop cards: Issued by financial institutions and can be used anywhere major credit cards are accepted (e.g., Visa or Mastercard prepaid cards).
• Network-branded cards: Issued by a third party but branded with a major payment network logo.

The popularity of stored value cards surged in recent years. According to a 2023 report by Mercator Advisory Group, the US gift card market reached $174.9 billion in 2022. This widespread adoption has attracted increased regulatory scrutiny.

Key Regulations Governing Stored Value Cards

Several key regulations impact stored value cards. These include:

• Bank Secrecy Act (BSA): Requires businesses to implement AML programs, including KYC (Know Your Customer) verification, to prevent money laundering and terrorist financing. This is particularly important for open-loop and network-branded cards.
• Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act): Expands the BSA's requirements and strengthens AML efforts.
• Dodd-Frank Wall Street Reform and Consumer Protection Act: Granted the Consumer Financial Protection Bureau (CFPB) authority over prepaid and stored value cards.
• State Gift Card Laws: These laws vary significantly by state and typically address issues like dormancy fees, expiration dates, and consumer disclosures. For example, some states prohibit dormancy fees altogether.

The CFPB issued rules in 2016 that classified most prepaid cards as “prepaid accounts” subject to the Electronic Fund Transfer Act (EFTA) and Regulation E. These rules provide consumer protections similar to those afforded to traditional bank accounts.

Consumer Protections for Stored Value Cards

Regulations are designed to protect consumers in several ways:

• Disclosure of Fees: Businesses must clearly disclose all fees associated with the card, including activation fees, dormancy fees, and transaction fees.
• Dormancy Fees: Restrictions on dormancy fees, and requirements for notice before assessing them. Many states have banned dormancy fees entirely.
• Expiration Dates: Restrictions on expiration dates. Federal law generally prohibits expiration dates less than five years from the date of issuance.
• Lost or Stolen Cards: Procedures for reporting lost or stolen cards and limiting consumer liability.

Compliance Best Practices

To ensure compliance with stored value card regulations, businesses should:

• Implement a robust AML program: Including KYC verification, transaction monitoring, and suspicious activity reporting (SAR). Didit can streamline this process through our identity verification and AML screening modules.
• Develop a strong compliance manual: Outlining policies and procedures for handling SVCs.
• Provide clear and concise disclosures: Regarding fees, terms, and conditions.
• Train employees: On compliance requirements.
• Stay updated on regulatory changes: Monitor the CFPB and state regulatory websites for updates.
• Conduct regular audits: To assess compliance effectiveness.

How Didit Helps

Didit's all-in-one identity platform simplifies stored value card compliance by providing:

• Identity Verification: Verify the identity of customers purchasing or reloading cards, helping to prevent fraud and comply with KYC requirements.
• AML Screening: Screen customers against global sanctions lists, PEP databases, and watchlists in real-time.
• Transaction Monitoring: Analyze transactions for suspicious activity and flag potential money laundering attempts.
• Reusable KYC: Allow verified customers to easily reload their cards without repeated identity checks, improving the user experience.
• Workflow Orchestration: Build custom verification flows tailored to your specific risk profile and regulatory requirements.

Ready to Get Started?

Navigating the regulatory landscape of stored value cards can be challenging, but with the right tools and knowledge, you can ensure compliance and protect your business.

Request a demo to see how Didit can streamline your compliance efforts: https://demos.didit.me

Explore our pricing: https://didit.me/pricing