Applying Regulation in a Virtual World

The recent launch of ‘O2 Money’ has brought prepaid solutions back into the limelight. However, it is important to note that prepaid can help to solve crucial business challenges as well as consumer issues. Companies of all sizes must be able to make efficient cross-border payments to operate effectively in multiple geographies. In particular, smaller more frequent payments pose a significant dilemma in terms of the high associated administration costs and time requirements. In light of these business challenges, virtual prepaid is emerging as a popular solution for instant, global payments. That said, and like everyone else, prepaid solutions must operate within a complex set of international regulations, and virtual prepaid schemes also entail some specific challenges.

Firstly, their digital nature complicates the interpretation of rules relating to the location where activity is taking place. Rules relating to territory can impact on where funds are held, where funds can be redeemed, and treatment of breakage. Location-based regulations are particularly relevant to solicitation for business, however in the case of virtual cards the normal territorial rules do not readily apply. Users in cyberspace can sign-up to providers without any specific targeting of a given territory. Solicitation for financial products is traditionally constrained by both regulators and the card schemes, both of which relate to national boundaries. However, it is possible for prepaid operators to tackle these problems through a combination of technology, sensible risk-based policies and active compliance risk management. For example, IP geo-referencing can improve the ability of virtual prepaid schemes to tailor to territorial regulations. 

The fast-moving nature of the virtual prepaid industry makes issues such as compliance more challenging than for traditional physical plastic-based cards. For example, the EU 3rd Money Laundering Directive allows fairly light ‘Know Your Customer’ (KYC) thresholds on low amounts of e-Money. However, in a digital world, an individual may relatively easily obtain 1,000s of virtual cards by creating distinct digital personas and thereby bypassing the KYC thresholds. A similar issue relates to the access of virtual cards by minors allowing them to purchase goods and services prohibited to under-18s. Data mining of transactions can be used to identify rare or suspicious patterns to combat money laundering or non-compliance with local regulations.

Whilst mapping territorial rules onto the digital universe will continue to pose challenges for virtual prepaid providers, those who embrace sophisticated technologies and take a global view are most likely to reap the business benefits from these solutions. Then virtual prepaid will be well placed to thrive in both the borderless online and territory-based offline environments.