I’m really looking forward to catching up with the latest in the pre-paid space at Prepaid 2010 in London on June 14th-16th. I’ll be chairing the session on Innovation in Mobile Payments on June 16th in the morning. Some people are not so happy with the march of pre-paid technology though, and do not regard the pre-paid card as the unalloyed benefit to society that many delegates to Prepaid 2010 do!
Its features include a legal loophole that allows money launderers to get around the requirement that cash or “monetary instruments” (share certificates, travellers’ cheques, money orders etc.) in excess of $10,000 must be declared on entering or leaving the United States. It is, however, perfectly legal to carry, say, $50,000 embedded in the magnetic stripes of so-called pre-paid stored-value cards.[From Drugs, terrorism and shadow banking | Analysis & Opinion | Reuters]
Is this an unfounded concern? Surely no smugglers would bother loading pre-paid cards with cash and then smuggling them in to the US?
According to a government indictment that stemmed from a DEA sting operation, drug dealers using pre-paid cards issued by Virtual Money, a company based in Texas, withdrew $7.1 million from automatic teller machines (ATMs) in the Colombian city of Medellin in 2006.[From Drugs, terrorism and shadow banking | Analysis & Opinion | Reuters]
Well, that’s not quite the same thing, is it. For one thing, it involves getting cash out of the US, not in to it, and it does not involve smuggling loaded pre-paid cards into Mexico, but loading the cards in the US and withdrawing the money in Mexico (which I would have thought made the criminals much easier to cash). Anyway, meeting about with pre-paid cards is, of course, peanuts compared to the gold old fashioned technique of stuffing cash in the trunk of the car and driving over the border.
Despite the concern over more sophisticated methods of moving ill-gotten gains, carting cash across borders has not gone out of fashion. In 2009, government agents along the border with Mexico seized $39.2 million in currency, according to official figures. That compares with around $10 million in 2008 and is due to more frequent checks of southbound traffic for cash and guns.
Nearly $40 million in confiscated cash sounds a lot. But it is less than pocket change, in the grand scheme of things. The U.S. Justice Department estimates that drug cartels smuggle $24 billion a year into Mexico, $40 million amounts to 0.16 percent of the estimated total. What about the rest?[From Drugs, terrorism and shadow banking | Analysis & Opinion | Reuters]
Actually, getting a pre-paid card in the US is already more costly, inconvenient and unattractive than it should be because of the requirements for identification that already exist to inconvenience honest members of the public.
Federal law requires us to obtain, verify and record information that identifies you when you open up a Walmart MoneyCard. We will use your name, address, date of birth and other information (including Social Security Number for U.S. citizens or government-issued ID for non-U.S. citizens) for this purpose. Please see the Cardholder Agreement on this site for additional details.[From Products]
I advocated raising the “anonymity bar” to €500 euros, thereby making it simple and inexpensive to provide cards for kids and students, but also with the goal of providing a simple and inexpensive platform for financial inclusion. But a prepaid card with €0 or €500 on it still weighs more than a €500 note, so why would money launderers carry suitcases full of prepaid cards instead of suitcases full of euros, dollars or pounds?
The reason why this focus on pre-paid cards is so odd — in the sense that it stops pre-paid cards from achieving more in the way of financial inclusion while doing nothing to stop crime — is that it suffers from the unfamiliarity premium, the psychological trap that people fall into whereby new and unfamiliar technologies because the focus for real and imagined ills, taking the focus away from the real problems. There’s another point to be made here. Pre-paid products can fulfill niches that other products cannot. Here’s an example.
Offshore Pro Group Prepaid Anonymous debit card card looks like a credit card, but has no name on it, just a numerical code. The user also gets a PIN code. The user calls his or her banker, who loads the card with a maximum 10,000 U.S. dollars .It can then be used to withdraw cash all over the world. Even better, there are no monthly limits of withdrawal, although a limit per withdrawal may apply. And you can reload the card when you run out of cash… Your privacy is protected—purchases aren’t made in the card user’s name.[From Anonymous Offshore Debit Cards]
My bank doesn’t provide any thing like this. Jim Breune was typically accurate with this comment about bank efforts in that space.
Sure, I’d love to have a reloadable card that my son could stow in his backpack for emergencies. But I’m not going to spend a half-hour looking for one, applying for a new account, and then trying remember where and how to access it. But if the process was painless and integrated with my online banking, I’d buy a half-dozen prepaid cards, one for each child, one to toss in the glove box of each car, and another for my briefcase[From PayPal Launches Drop-Dead Simple Teen Prepaid Card & PayPal Account (NetBanker)]
As it happens, in my backpack I really do have a PayPal prepaid Visa card. I thought this was quite a good product, but I forgot the PIN so I had to go and log on online to reset it, but when I went to do this I’d forgotten the password to log in. When I went to the “forgot your password” page, it asked me to answer my personal question, and I’d forgotten the answer to that as well. (Authentication strategy is should be a priority in the financial world for the coming year, but that’s another point.) PayPal is a good example, as it happens, because they’ve been actively developing products in this direction.
According to PayPal, “the Student Account eliminates the hassle of everyday money exchange between parents and teens, while giving teens the chance to learn good spending habits through the experience of being responsible for their own money. Parents can establish up to four PayPal sub-accounts for their teens, transferring funds into those accounts when needed, on a one-time or recurring basis.”[From PayPal Introduces Student Accounts for Teens]
This seems like a pretty good product, and if it was available in the UK then I’d give it a try. My kids do buy stuff online, but I generally use my credit card to buy stuff for them because I don’t want them using their own debit cards online and the prepaid cards I got them to use on holiday in the US last year can’t be used online, or at least can’t be used online without filling out some tedious forms that I couldn’t be bothered to go through. Giving the kids their own accounts but bounding them seem like a good idea. But since most of what they buy isn’t online, I’d guess much rather give them teen debit cards that are sub-accounts from my own credit card, as this would deliver more flexibility and save me time and effort. If could set a limit as to how much they can spend per month and set the categories they can spend it on, that would be great. There are so many great new products waiting to be invented!
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]