Why Manufactured Spend is a Problem for Retailers

I saw this tweet yesterday. I’ve been wondering why it’s taken Cary so long. (Yeah, that’s me name dropping CVS’s prepaid products buyer. I worked with Cary during my tenure as Director of Retail Strategy at Green Dot Corporation.)

In my time as a product lead at a prepaid card provider and as Founder/CEO of Wallaby Financial, I’ve had the opportunity to speak with with a lot of leaders about this world.  Depending on your position in the value chain you do or do not like manufactured spend.  Let’s look at the players first:

  1. Consumer

  2. Retailer (e.g. CVS)

  3. Load Network (e.g. Green Dot or InComm, owner of Vanilla)

  4. Prepaid Card Issuer (Green Dot, InComm, Amex)

  5. Credit Card Issuer (e.g. Chase, Citibank, AMEX, etc.)

Manufactured spend using prepaid card works when consumers purchase reload products at retailers that earn bonus points (e.g. CVS or Staples), then load the reload onto a prepaid card like Amex Bluebird, then pay the credit card bill with the bill pay feature of the prepaid card.

For the past few years this has generally been humming along. CVS makes extra money from reloads being sold. The load network makes money from reloads being sold. The prepaid card issuer makes money from card fees and bill pay fees.  The credit card issuer tends to get screwed a bit.

That said, it depends where you are. If you’re AMEX, you love Bluebird being used more and probably don’t worry as much about Chase Ink cards being used not as designed.  If you’re Chase, you’re probably a bit less happy.

All this aside, there’s one party we haven’t mentioned who hates this. That is regulators.  Whenever a bunch of funds are moving around in odd ways it presents a risk for money laundering.  The folks doing manufactured spend tend to say, “hey, I’m not a criminal, so it’s OK.”  That’s an overly simplistic look.

The Federal Reserve Board, other bank regulators and FinCEN (the Financial Crimes Enforcement Network) really don’t like all this. Reload networks and issuers have to file Suspicious Activity Reports (SARs) and other documentation regarding AML and other PATRIOT Act requirements all the time.  In addition to “generic” money laundering, there are a lot of anti-terrorism concerns at play.

Additionally, there is just a ton of fraud risk here.  That lies on the retailers and card reload/card issuers.  In general, the contracts for retailers with the reload networks (GDOT/InComm) require that retailers only take CASH for products that can be directly converted to CASH.  If the retailer takes non-cash and it’s bad, then it’s the retailers liability.

This number can add up quickly to millions of dollars in liability. I’ve seen it first hand.

So while the travel hackers are bending the rules, there are real fraudsters and criminals who are using this exact same setup to steal and launder money.  For example, you can steal a credit card number (e.g. from the Target breach), then buy a bunch of reloads, then get cash from the credit card.  This fraud problem is going to end up with InComm or CVS in the end.  That’s not good.

I’ve been amazed how long CVS and InComm have been letting this go on.  The folks at GDOT have much better control over this stuff because they don’t also sell gift cards like InComm does.  I don’t know what the magnitude of the problem is for InComm/CVS, but I’m sure it’s big and growing.

No retailer, especially as large public one like CVS wants to be responsible for crime and fraud and I imagine this whole setup has been costing them some real money.

I’m not sure this is the END of the Vanilla Reload game.  When I was in charge of merchandising for Green Dot, I used to travel around from drug store to drug store to monitor compliance with GDOT and retailer policies.  Let’s just say it was weak.

I am sure that Cary’s memo is for real–that’s what they look like. That said, you may still find a store that lets you do what you want (if they have not rolled out changes to the Point of Sale software to enforce the rule). I do think this is pretty much the end for most people trying to play this game.  That last line in the cut-off memo indicates that the software prevention used for GDOT is being extended to these InComm products.

It’ll be interesting to hear what goes down on April 1st, but it isn’t a joke.