JPMorgan Chase plans to exit prepaid card business

Adam Jeffery | CNBC

JPMorgan Chase plans to sell or exit over time its business of issuing prepaid cards for corporate payrolls and government tax refunds and benefits, the company said on Thursday.

The cards, which had been offered with cash and treasury services to companies and governments, had become a headache of risks in operations and regulations, according to a person familiar with the matter who was not authorized to speak publicly.

Last month JPMorgan warned some 465,000 holders of the cards that their personal data may have been accessed by computer hackers who attacked its network in July.

The company mailed incorrect replacement cards to some 4,000 people receiving payments from the state of Connecticut. The state treasurer blasted the bank for its "obvious lack of attention to detail."

(Read more: Google debuts prepaid debit card)

Government regulators are focusing on whether corporate payroll programs that use the cards have sufficient safeguards against burdening employees with fees.

In July, New York state Attorney General Eric Schneiderman sent letters to more than 20 companies asking for details on how they use payroll cards. The probe started after complaints from workers and advocacy groups about fees bank charge for using the cards.

Employers have said that they offer the cards to employees as an option along with paper paychecks and direct deposits to bank accounts. Even with the fees, they can be cheaper than check-cashing services.

(Read more: Employers can't force debit cards on their workers)

Tausche Report: Legal issues hitting JP Morgan

But there have been complaints that direct deposit choices are hard to exercise and a lawsuit was filed against a McDonald's franchisee by an employee who claimed she was required to use a JPMorgan Chase payroll card.

The bank was not sued in that case, but the complaint was bad for the Chase brand name.

The U.S. Consumer Financial Protection Bureau in September issued a bulletin to reiterate that laws and rules on electronic funds transfers apply to payroll cards. The bulletin specifically noted that the CFPB has authority over banks providing payroll cards, which raised the possibility that banks might be expected to make sure corporate clients were following rules when paying employees with cards.

JPMorgan became a target for law enforcers and regulators after the biggest bank in the United States by assets lost $6.2 billion in a derivatives bet in 2012 out of its London offices.

(Read more: JPM deal: 'Dangerous precedent')

On Tuesday, the company agreed to pay $2.6 billion to settle government and private claims against it for not reporting suspicions of fraud by convicted Ponzi-schemer Bernie Madoff, its long-time client. And, it agreed last year to pay $13 billion to settle government claims over mortgage-related instruments sold before the financial crisis.

Since then, JPMorgan has been moving to simplify its operations after its risk controls and guards against money laundering were found deficient by regulators. Critics have also said the bank is too big to manage.

JPMorgan decided last summer to exit its physical commodities business after concluding potential returns were not worth the regulatory hassle. It is also getting out of lending to students, as well as scaling back on international transactions that carry heightened risks of money laundering.

(Read more: Feds probe JPMorgan interference in Madoff case)

According to JPMorgan's statement, the bank "will explore a full range of options for its prepaid card business, including a sale." In the meantime, it will continue to support current clients and cardholders, but will not take on new business. The decision does not affect Chase customers holding credit, debit or prepaid "Liquid" cards, the company said.

The business contributes too little toward JPMorgan's nearly $100 billion in annual revenue to have to be disclosed in its income statement.

—By Reuters