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 Banks, N.A., and Sprinbok Services, Inc. The Payment Cards Center of the Federal Reserve Bank of Philadelphia hosted a workshop on March 18, 2011 to examine the implications of insolvency in the network-branded prepaid card value chain, to review how market participants gave 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 Associations (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 of a key participant. In addition, this paper highlights practices that have been developed in the industry to mitigate this risk.