What to Know About Prepaid Payment Cards Before Uncle Sam Acts to Change Them
Editors' pick: Originally published July 14.
The Consumer Financial Protection Board is getting closer to issuing new rules on the prepaid payment card industry, and change should be in the air for a card sector that is too under-regulated in the eyes of consumer advocates.
That is likely not the sentiment from the prepaid card industry (the Branded PrePaid Card Association has a lot to say about the topic here) but a so-called "final rule" on prepaid cards is imminent.
How imminent? The CFPB says it will rule this summer, and rumblings from Washington, D.C. say new mandates on prepaid cards, especially on fees and charges, are virtually guaranteed.
While both the prepaid card sector and card-using consumers await that call from Uncle Sam, the stakes are growing higher for an industry that is flexing its muscles these days.
Consider these numbers from The Pew Charitable Trusts that affirm prepaid payment cards are now embedded in the U.S. financial culture, no matter what the federal government says or does about them:
1. Prepaid card use jumped more than 50% between 2012 and 2014, driven primarily by increased adoption among consumers with bank accounts.
2. Approximately 23 million U.S. adults are regularly using prepaid cards.
3. 72% of unbanked and 45% of those with bank accounts say they use prepaid cards to avoid overdraft fees.
4. 86% of unbanked card users and 81% of those with bank accounts would rather have a transaction declined than pay a $35 overdraft fee.
5. 57% of unbanked and 46% of those with bank accounts say they use prepaid cards to avoid check-cashing fees.
6. 67% of unbanked and 50% of banked prepaid card users say they use the card to avoid getting into debt by not having the ability to exceed their balance.
With so many prepaid card user experiences at stake, the card industry is asking the federal government to tread carefully.
"Without a doubt, consumers deserve full disclosure of the terms and conditions of any product they are purchasing," states Brad Fauss, president and CEO at the Network Branded Prepaid Card Association, in an op-ed appearing in American Banker this June. "However, it is also critical that regulations are implemented in a way that does not restrict consumer access by creating such insurmountable hurdles that card providers can no longer do business."
Fauss tells TheStreet he expects the CFPB ruling to be generally similar to the proposed rule the agency floated months ago, which seeks to curb fees and open up full transparency to card users, among other changes. But any over-reaching, he says, will negatively impact the most frequent users of prepaid cards - including low-income and so-called "unbanked" Americans.
"If the CFPB doesn't correct some of the overly burdensome compliance requirements appearing in the proposed prepaid account rule, certain types of prepaid accounts could be removed from the marketplace, ultimately limiting consumer access," he says. "This would be especially harmful to unbanked and underbanked consumers - many of whom rely on prepaid cards as their sole or preferred means of access to the financial services system - and Millennials, who are one of the fastest growing categories of users of prepaid cards."
But that's pretty much the point, say card industry analysts - those are the users who need protection from high-fee and low-transparency prepaid card providers.
"The CFPB proposal is focused to a significant degree on use of prepaid cards on unbanked/underbanked, with consumer protections targeted particularly on those groups," notes Kevin Petrasic, a partner and head of the Global Financial Institutions Advisory practice at White & Case LLP.
Petrasic, who says the prepaid market is already fairly robust, and growing rapidly with uptake by those who are already banked, expects the CFPB to try and find some middle ground, that appeases card providers, and offers better protection to card users.
"The challenge for the CFPB is how to promote consumer protection in the prepaid space without dampening demand," he says. "Expect the agency to moderate some of the trade-off between consumer protection and regulatory burdens by seizing the opportunity to promote prepaid for unbanked/underbanked in a manner that could fuel expansion in this market while also facilitating continued growth by millennials, and other frequent users."
More specifically, other industry observers say the CFPB will most likely require prepaid debit card issuers to include printed summaries of fees and other possible charges on their retail packaging. "Unlike credit card issuers, prepaid debit card issuers do not currently have to adhere to any clear and consistent fee disclosure rules, so this should be a positive change for consumers that find it difficult to decipher the complex fees structures of many prepaid debit cards," says Joshua C. Heckathorn, President of CreditNet.com.
"In addition, it wouldn't surprise me if the CFPB requires that any prepaid debit cards offering overdraft services be subject to the same rules as credit cards, thus requiring credit evaluations and detailed account statements," he adds. "This could result in many prepaid debit cards dropping overdraft services altogether in order to avoid the additional cost of compliance."
The bottom line? Petrasic expects "sound regulation that is appropriately moderated can benefit all market participants, including issuer growth."
That would satisfy the need for "balance," for a prepaid card industry that could certainly use it.