Do Prepaid Card Regulations Go Too Far?

Prepaid cards are more popular in the United States than ever before. According to a 2015 report from the Pew Charitable Trusts, about 12 million people use prepaid cards at least once a month, and approximately $65 billion was spent with these cards in 2012, more than double what was spent using the cards in 2009.

With nearly 10 million households still without a traditional checking account, prepaid cards have become a fixture of the American economy. The cards — particularly general purpose reloadable (GPR), payroll and government benefits cards — are often used by unbanked or underserved consumers, many of whom are either not eligible for or do not want a traditional bank checking account.

Although prepaid cards have long been subject to a host of state and federal regulations and most issuers have voluntarily applied extensive consumer protections similar to those afforded to debit cards under Regulation E, until now, there has not been a comprehensive federal rule applicable specifically to prepaid cards.

In an effort to codify consumer protections for prepaid cards, the Consumer Financial Protection Bureau (CFPB) recently amended Regulation E. The nearly 1,700 pages of rule updates and explanatory information include requirements for financial institutions to disclose cardholder fees prior to acquisition, provide free transaction histories to cardholders for up to 24 months, provide error resolution rights and limitation of liability for cardholders, offer provisional credit for disputed transactions, post cardholder agreements to the bureau’s website and offer credit card protections to those who use cards that allow overdrafts.

To find out more about the new rule, the bulk of which takes effect Oct. 1, 2017, and what it means for the digital banks and financial institutions that issue prepaid cards, PYMNTS recently spoke with Brad Fauss, president and CEO of the Network Branded Prepaid Card Association (NBPCA). When PYMNTS caught up with Fauss, the CFPB regulations were freshly issued, and he and his team were still working their way through the lengthy regulations.

Fauss’ initial impression was that, while he believes reloadable prepaid cards used as primary transaction accounts by consumers should receive protections similar to those provided to checking accounts, the CFPB’s new rule may have gone too far due to the overly broad definition of prepaid account and the costly compliance requirements that could stifle the industry and hurt the consumers the regulations are designed to protect.

“From a consumer perspective, it’s definitely a step in the right direction, but it could also mean fewer products and innovation,” Fauss said. “Consumers expect both checking accounts and reloadable prepaid cards to be treated the same. If these cards were treated just like checking accounts in the final rule, we’d be very happy, but in many cases, the rules for prepaid accounts are significantly more onerous than regular checking accounts.”

Is prepaid too broadly defined?

One of the biggest problems with the new rule is the broad definition of a prepaid account, Fauss said.

He noted that the rule covers many of the more than 15 different types of prepaid card products in the market, including non-reloadable prepaid cards and other card products that consumers don’t rely on as their primary transaction account.

“We thought the definition of prepaid account was too broad in the proposed rule, and we were disappointed that it was not scaled back,” Fauss said. “While we were encouraged by the additional carve-outs for prepaid cards issued for dependent care assistance, transit and parking reimbursement and disaster relief, we thought that the same rationale underlying these exceptions should have been extended to exclude all non-reloadable prepaid card products.”

According to Fauss, because these varied types of cards are all included under one set of requirements, the rule often doesn’t fit well for every product type.

“I think [the new CFPB rule] may reduce the amount of offerings available in the market,” Fauss said. “There are some products that might not be able to withstand the increased costs of compliance and expected increase in fraud losses when provisional credit is required for products where there isn’t an ongoing relationship with the consumer.”

However, Fauss believes that it will be business as usual for providers of GPR, payroll cards and government benefits cards, which have been complying with existing Regulation E for years (in some cases, voluntarily), once they are able to work out the kinks for the implementation of the numerous new requirements in the final rule.

Overkill on the overdraft protections?

One of the most anticipated pieces of the CFPB’s prepaid card rule was the new overdraft protection it extends to consumers.

Fauss noted that one of the product features that could be materially affected is overdraft protection. The new rule subjects prepaid cards with overdraft features to the requirements of Regulation Z, which are more onerous than the overdraft requirements applicable to checking accounts under Regulation E. Fauss indicated that NBPCA member organizations are still analyzing the final rule to determine whether they will be able to still offer an overdraft feature on their prepaid card products or they will be forced to try to develop new products and services to serve this significant consumer need.

According to Fauss, if providers stop offering overdraft features on prepaid cards or only make it available to a small subset of their customers, it could cause significant issues for consumers who rely on these features to fund necessities, such as groceries or gas, while they wait for their next paycheck.

“Unfortunately, income variability has become a significant issue in the U.S. with the rise of the part-time gig economy, and taking away valuable tools from consumers, such as overdraft, does not make the underlying problem go away,” he said.

“Customers who use these overdraft features may have to find new tools or methods of covering shortfalls,” Fauss added. “You’re potentially taking those consumers’ tools away, so they will be left relying on family or friends or less safe means to borrow money, which will often cost them many times more than a prepaid card overdraft fee. There aren’t many good options remaining for these consumers if overdraft isn’t available.”

Nonetheless, Fauss remains hopeful that the industry will find ways to continue to serve this important consumer need.

The race to implementation

Fauss stressed that much of what will result from these new regulations, which were still under initial review when he spoke with PYMNTS, remains unclear. With nearly 1,700 pages to comb through, breaking the regulations down conclusively is still the immediate industry task at hand.

He noted that, while a 12-month window may seem like a long time to prepare for the new regulations to take effect, it’s actually a relatively quick turnaround time for implementation that may cause problems for card issuers and consumers alike.

“There are going to have to be some real changes made through the whole prepaid card industry to get ready for this,” Fauss said, including the production of new packaging and disclosures by card issuers and a change in some features offered. “Based on the substantial operational and systems changes that will be required, as well as changes to card packaging, disclosures and cardholder agreements, all of which typically have to be approved by issuing banks and card networks, the industry will be hard-pressed to implement the required changes from this broad-sweeping new regulation within the time provided in the final rule.”

However, Fauss indicated that the industry appreciated the flexibility provided by the bureau in not having to pull and replace existing card packaging materials that were prepared in the normal course of business before the effective date of the rule, as well as the delayed effective date of Oct. 1, 2018, to comply with the cardholder agreement posting requirements.

Will the new regulations need refinement in order to offer consumers the best protections and innovative new features possible? Stay tuned.

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