New Payment Methods in Finance

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Questions and Answers

What distinguishes open-loop prepaid cards from closed-loop prepaid cards?

Closed-loop cards can be reloaded with additional funds.

Open-loop cards can be used anywhere their brand is accepted. (correct)

Closed-loop cards are primarily utilized for online transactions.

Open-loop cards can only be used at specific retailers.

Which of the following statements about the management of funds for prepaid cards is accurate?

Funds are managed individually by customer names.

Funds are kept in pooled accounts or special accounts identified by card numbers. (correct)

Funds in prepaid cards can only be accessed via physical stores.

Banks only manage funds for reloadable prepaid cards.

What are some examples of New Payment Methods (NPMs) provided in the financial industry today?

Checks and direct deposits

Cash and debit cards

Bartering and credit transactions

Electronic purses and mobile payment applications (correct)

In what decade did electronic transactions begin to emerge within the United States financial landscape?

1970s Signup and view all the answers

Which of the following methods cannot be used to load money onto prepaid cards?

Stock investments Signup and view all the answers

Why might a user choose to utilize a closed-loop prepaid card instead of an open-loop card?

Closed-loop cards offer promotional rewards at specific retailers. Signup and view all the answers

How have New Payment Methods (NPMs) impacted traditional payment methods?

They have significantly reduced reliance on physical payment methods. Signup and view all the answers

What is one of the primary laundering advantages associated with prepaid cards?

Ease of transporting large amounts of money across borders Signup and view all the answers

Which risk is NOT associated with prepaid cards according to FATF reports?

Mandatory face-to-face funding restrictions Signup and view all the answers

What regulatory changes were introduced by the European Union to mitigate risks associated with prepaid cards?

Implementing maximum stored amounts without diligence checks. Signup and view all the answers

What is a primary distinction between prepaid cards and electronic purses?

Prepaid cards link to external financial accounts, whereas electronic purses do not. Signup and view all the answers

Which measure is NOT typically associated with reducing laundering risks in electronic purses?

Allowing unlimited spending without limits Signup and view all the answers

How do mobile payment applications present additional laundering risks compared to prepaid cards?

Account setups often happen without in-person verification. Signup and view all the answers

What limitation was imposed on online transactions for prepaid cards under the EU regulations?

Maximum limit of €150 per transaction Signup and view all the answers

Which of the following is a characteristic feature of mobile payment applications?

They facilitate peer-to-peer transfers easily. Signup and view all the answers

Study Notes

Evolution of Payment Methods

Financial transactions have evolved significantly over the last fifty years, transitioning from cash and checks in the 1970s to various digital options today.
New Payment Methods (NPMs) are defined as technologies enabling transactions that serve as alternatives to traditional methods.

Prepaid Cards

Prepaid cards, one of the most recognized NPMs, allow users to store funds directly associated with the card.
Purchase and activation occur through online platforms, banks, or retail stores.
Users can load money onto prepaid cards via cash, direct deposits, or debit cards.
Types of prepaid cards include:
- Open-loop cards: Issued by credit card companies (e.g., MasterCard, Visa) and accepted anywhere that brand is used; reloadable when funds are exhausted.
- Closed-loop cards: Typically sold as gift cards and can only be used at specific retailers, usually not reloadable.

Money Laundering Risks with Prepaid Cards

Prepaid cards feature attributes attractive to criminals such as portability, anonymity, and ease of transferring value.
Risks associated with prepaid cards encompass:
- Face-to-face interactions not required to load funds.
- Easy cross-border shipping and purchases.
- Cash withdrawals from ATMs and buying high-risk goods/services.
- Allowing multiple users to load money and sources from unknown channels.
Significant ease of transporting large sums; for example, $10,000 can fit on a 5-gram prepaid card.
FATF identifies risks including anonymous cardholders, obscure funding sources, high-value limits, and offshore issuers potentially evading laws.
Regulatory responses include the EU's Fourth and Fifth Anti-Money Laundering Directives, establishing transaction limits (€150) and restrictions on online transactions (€50).

Electronic Purses

Electronic purses resemble prepaid cards but maintain balances independently from external financial accounts.
Transactions are managed via an embedded chip within the card.
Issued by regulated institutions, electronic purses incorporate several safeguards against money laundering, specifically:
- Limitations on the number of cards per individual.
- Maximum load, balance, and daily spending limits.
- Know Your Customer (KYC) documentation requirements.
- Monitoring for suspicious activities linked to customer's accounts.

Mobile Payment Applications

Mobile payment applications facilitate transactions via mobile devices, acting as a digital alternative to traditional cash or cards.
Users can execute peer-to-peer transfers or in-store purchases, streamlining processes such as bill repayment.
Accounts typically require online setup and funding, reflecting similar laundering risks as prepaid cards, while adding more anonymity risks due to minimal identity verification at setup.

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Description

Explore the evolution of payment methods over the past fifty years, from cash and checks to today’s innovative technologies. This quiz covers the impact of web-based solutions and the role of the Financial Action Task Force in defining New Payment Methods. Test your knowledge on the changes in financial transactions through the decades.