redesign | payments: Finally, proposed protections on prepaid banking products

In November, the U.S. Consumer Financial Protection Bureau (CFPB) published proposed regulations seeking to protect consumers in a market that has mostly been ignored: prepaid banking products.

The prepaid product market has grown from a $1 billion business in 2003 to an estimated $100 billion in 2014, with no signs of slowing. About 8 percent of all U.S. households use prepaid card and accounts, representing the growing number of people without bank accounts. Typically, prepaid accounts provide a way to pay bills electronically or purchase items online for those without credit or debit cards.

What exactly are prepaid banking products? Mostly preloaded and reloadable debit cards, but the proposed regulations extend beyond any plastic in your wallet. The CFPB also seeks to regulate electronic code or any device designed to store prepaid funds or capable of being loaded with funds. That means the regulation would cover not only physical prepaid cards such as those issued by employers to pay wages or those provided to pay government benefits (such as unemployment), but also electronic wallets such as PayPal, Google Wallet or Venmo.

The proposed regs relate only to general purpose cards that are not limited to a company or store, and they expressly exclude store-specific gift cards, gift certificates and loyalty programs, which are regulated, to a degree, under the Credit Card Accountability Responsibility and Disclosure Act (CARD Act).

The goal of the CFPB’s proposed regulations is to provide the growing base of prepaid account users with similar protections enjoyed by credit card users. Prepaid accounts are currently ignored by existing federal regulations, leaving millions without adequate protections from unsavory and deceptive practices. For example, prepaid users have unknowingly been charged overdraft fees and workers are often forced to pay ATM fees to access their own wages. Other cards come with a cadre of hidden fees such as charges for paper statements, excessive fees to replace lost cards and even monthly charges for inactivity.

While bank accounts and credit products may have similar fees, they are highly regulated and required to disclose them. The proposed regulations would be the first to require any such disclosure for prepaid cards.

“Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts,” said CFPB Director Richard Cordray in a news release. “Our proposal would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone or sending a payment.”

The regulations would require better mandatory disclosures of fees and the cost associated with prepaid accounts (similar to the black Schumer box seen on every credit card offer), caps on what a consumer must pay if the prepaid product is lost or stolen, free and easy access to prepaid account statement information and improved error resolution assistance.

The regulations also seek to provide protections from overdraft funds (and related fees and penalties) on prepaid products. Most issuers of prepaid cards no longer allow such overdrafts, but at least one major issuer — NetSpend, a unit of Total System Services, and the largest issuer of payroll cards — still does. The new regulations would require companies such as NetSpend to comply with disclosures required under the Truth in Lending Act and the CARD Act before extending credit in the form of an overdraft payment.

To see the proposed regulations, visit https://federalregister.gov/a/2014-27286.

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