The Legal Line
Dear Legal Line:I was watching the use of stored value cards by FEMA after the hurricane hit the Gulf Coast. There seemed to be a lot of problems actually getting retailers in those areas to recognize the cards for purchases. This seemed to compound the security problems victims were already experiencing with stolen cards being used by others with little or no authorization protection. My concern is that [my company] is exploring a transition from prepaid calling cards to stored value cards because of shrinking profit margins in the phone card industry and losses we have had with distributors. We hold the distribution channels [in several markets and states] but know that generally retailers get flaky with new products. [… We] have had prepaid calling card carriers go bust on us in the past and know how that can destroy retailer relationships…now how about stored value cards? We are now ready to launch a major sales initiative and are uncertain as to the current risks? If retailers have problems recognizing government cards, what will be the implication for our cards?** This month’s Legal Line question came via a direct phone call and then an email to Legal Line author Attorney Edward Maldonado. Any references related to subject matter of a current legal nature have been deleted, as well as any reference to the identity or business of the person, at the questioner’s specific request.Legal Line Response:I am really not sure if the problem that you refer to was a result of retail outlets not recognizing the cards, as much as it was a question whether benefit recipients were not educated on the proper use of the Electronic Benefit Transfer (EBT) program’s debit card, and, not educated on how to properly protect themselves from good old fashioned “fraud” by thieves and scam artists after Katrina. The federal government has had the ability to do EBT for the past two decades, but the use of a Stored Value “branded” card is a relatively new initiative by FEMA. It is one worth understanding before passing judgment on all aspects of stored value card services. First, I think that there are significant differences between outward paying EBT programs and privately developed open-loop and closed-loop consumer Stored Value Cards (SVC). I believe if you weigh these differences and really look at the SVC market, the issues that arose from the FEMA may not be ones that truly affect your SVC product. However, there are lessons to be learned in all of this.As far as knowing the differences between EBT and SVC, my personal experience with EBT programs was in the early 1990s with the implementation of the State of Illinois’ electronic benefits transfer program to cut the costs of the delivery of state benefits to rural and inner-city recipients. The focus of EBT then, as it is the focus today, is to provide a cost-effective and secure method of benefit delivery directly to the individual recipient. Whether or not the recipient has multi-functional or flexible use of the EBT funds once received is not as important to the government as the immediate accessibility to funds by the recipient. Therefore accessibility is the paramount function of EBT. This makes sense as most EBT funds disbursed are at set monthly or bi-weekly intervals, and, most EBT recipients are registered in the EBT processing systems long in advance of fund transfer. Good examples of EBT type programs and benefits are Child Support Payments, Section 8 Benefits and Disability Benefits.Private SVC services work on much different economic principles than those of EBT programs. The convenience to the end-user tends to “make or break” a SVC product or service in the marketplace. This is true for credit card branded SVCs, open loop re-loadable SVCs, Payroll Cards, or even closed loop store or gift cards. If the end-user can use it with little or no complication, then the prospects for continued use of the SVC by the consumer are high. This also means that the more points of acceptance the SVC has (such as retail outlets like stores), the better odds there are for business success. Private SVC products and services additionally face greater competition among providers requiring that operation and use of the cards be straightforward and limits be clearly understandable. If an SVC service is too hard to understand, then consumers may not use it. A final difference, and major hurdle for private SVC services is government regulation as to disclosure of limitations or applicable charges. Because of regulation, certain disclosures and consumer education are required from the first day of operation. This is particularly true since many SVC products are not linked to depository accounts protected and insured by the FDIC. The end result is that SVC products and services, in their various forms, tend to be more flexible to the user, more widely accepted, and more easily understood by the consumer when using them. This being said, let’s consider the FEMA program and how it was similar and different to your Commercial-driven SVC and your excepted sales into the marketplace.The FEMA program’s EBT method of delivery was a branded MasterCard debit card that could be used with either PIN-based online debits, PIN-based offline debits, or at ATMs. These debit cards were a closed-loop stored value product in the sense that the cards had no re-load capabilities and could not be re-loaded at merchant or retail points of sale once FEMA dedicated the beneficiary’s account funds. Any benefits added to the card after issuance were by FEMA itself. FEMA’s issuing bank was a well-respected financial institution, JP Morgan Chase - by no means an obscure or small bank. The funds were also held in FDIC depository accounts, therefore the cards were “debit” in nature as opposed to funds held in transition as in certain SVC products. The EBT debit cards also had several “security restrictions” to prevent anticipated “misuse” of EBT funds. These comprised blocked merchant codes to which the cards could not be used: Betting andOff-track Betting Merchants; Dating and Escort Services; Cigar Stores and Stands; and Beer/Wine/Liquor Stores. These are standard blocked categories for most EBT programs from the federal government. However, the cards were not blocked for any general merchandise, home or grocery stores. The cards also had holograms (MasterCard) and signature requirements at the time of issuance to limit counterfeiting/fraud/duplication. As far as a method of delivering general benefits to entitled recipients, the cards appear to be a traditional EBT method and program. So then, what went wrong?Reports as early as September 10th, 2005 out of the Gulf Coast indicate that most fraud connected to the FEMA debit cards focused on the inexperience of the recipient with the use of the debit card as a EBT service. For example, a common scam was to mislead the recipient to withdraw the entire amount of the card at one time – so to make a $55.00 dollar purchase at a particular store the full value of the account would be drawn, leaving the recipient open to be victimized by theft, robbery or price gouging. Another scam had involved people representing themselves as FEMA employees demanding the recipients to return the cards back to the government under the pretence they would be latter re-issued. The victims did not see the card equal to cash and therefore handed over cards without hesitation.These scams play on the recipient’s inexperience and unfamiliarity with the card as an EBT form of relief. Most recipients were familiar with ATM debit cards but not an EBT card. This added to the “fog-of-war” effect that followed the massive destruction of Katrina, and it’s not surprising that these incidents occurred. The most obvious remedy to such a problem is clear: better user education. However, amid the chaos that followed the storm, there were other more important priorities. In the end, it was easier for FEMA to stop issuing the EBT debit cards to Katrina victims.In this same time period, September 12th through 15th, there were also reports that some stores and retailers also upheld standing (store or chain) policies and did not accept any debit transactions – however this was relatively limited. This may be the source of your belief that the FEMA debit cards were not recognized, or declined, on a widespread basis, however, this simply was not the case. Once the degree of devastation was realized, store chains, stores, out-of-state banks, and others pulled together to give as much access to lifeline cash and benefits as possible. What was clear, however, with the FEMA disaster relief debit cards is that as an EBT program, FEMA may need to focus on user instruction and education to really be an effective EBT disaster relief program.Now back to your concerns with retailers recognizing your SVC. I believe that there is one important consideration that you should not be confused about: EBT is not SVC, pure and simple. While both often concern similar brackets of income and people who may be credit challenged, functionally there are two different purposes and functions of the service. EBT is a government service concerned with safe and immediate deliverability of funds. SVC is concerned with consumer use and convenience, as well as widespread acceptance. Private SVC services are built with retailers and consumers alike. This means that should you really have a lack of confidence issue with your SVC and retailers, it is not because of Katrina and the FEMA EBT program, it is because they do not understand your SVC or have a problem with the way you offer it. These are issues to be resolved with good retailer support and good old fashioned customer service. These are also issues that can be prevented with good retailer support. As far as new risks in the SVC industry after Katrina and Rita, there are no new risks associated with SVCs because of the FEMA cards. In fact, I think that the FEMA could lean something from the private SVC sector.Good Luck and Success in the Industry.Do you have questions for Legal Line? Send them firstname.lastname@example.org.