The CFPB’s New Prepaid Card Rule Is Making The Rounds

In a scene that is increasingly rare when the CFPB starts talking about new rules and regulations, all major parties involved in the conversation seem to be in basic agreement on them. Consumer and industry officials seem to have concluded that the CFPB’s new rules on prepaid cards will likely strengthen the already growing industry.

It’s like the bizarro universe version of the payday lending regulations that dropped about a month ago, which also managed to cause an unexpected blooming of consensus.

Just probably not for the reasons the regulators who created the rules were hoping for.

Everyone agreed — from the team at the Pew Charitable Trusts to the largest payday lender in the nation, Advance America — that the CFPB stepped up to the plate and … whiffed. Specifically, both sides rapidly came to a consensus that the CFPB had successfully created a framework that would both harm consumers and businesses — without offering much in the way of clear benefits to anyone.

In short, not a great review.

Which may make the current positive feedback even more pleasant. There is, after all, something to be said for novelty.

This time around Pew likes it.

“When we look at the rules that the CFPB has proposed, they are more or less providing stability and certainty for an industry that seems to be continuing to grow,” Thaddeus King, an officer with the consumer banking project at The Pew Charitable Trusts, told Bloomberg BNA.

And, despite some initial reservations, it seems the prepaid card industry is also — cautiously — on board.

So, why the widespread agreement?

Prepaid’s Changing Role In Consumers’ Lives

“Prepaid cards have a great potential to help people who have really not been served well by overdraft fee-heavy bank accounts that banks traditionally offer,” Associate Director Lauren Saunders of the National Consumer Law Center told Bloomberg BNA.

Though typically associated with being a financial tool of the unbanked — a not entirely incorrect impression given that the majority of prepaid customers are also unbanked customers — that profile is quickly changing. The biggest growth group in prepaid card use is actually among millennials who already have conventional bank accounts, i.e. checking accounts.

And the growth is moving at a fairly rapid clip. According to Pew’s data from 2015, the use of general purpose reloadable (GPR) prepaid cards was up 50 percent, with at least 10 percent of the population using a GPR once a month at minimum. Underbanked use was static; use among checking accountholders, on the other hand, jumped from 4 percent to 7 percent.

So, why use a prepaid card if one, theoretically, has a debit card that could serve the same purpose?

Budgeting was a leading reason. A debit card — particularly one loaded with the mixed blessing of overdraft protection — has the potential of allowing a customer to spend past their cash reserves and then pay a $30–$35 fine for their failure to balance their checkbook. Consumers who break out their budgets onto a prepaid card don’t necessarily face that problem. Once the card is empty, it won’t overdraft so much as it just won’t work.

It also has the ancillary benefit of helping one control the spending of others — a positive gain that any parent who has ever given a credit card to a college student with a promise they would use it “just for emergencies” and later gotten a horrifying bill full of “fashion emergencies” can appreciate.

The New Rules 

While industry representatives, like attorney Craig Saperstein, were not exactly writing poetic odes to the new rules, they readily conceded the final regulations that seem headed toward the ecosystem “could have been a lot worse.”

Under the rules as currently outlined, money stored on GPRs will continue to carry federal deposit insurance via the entity that issued the card. Cards will continue to be open to consumers so long as they have cash sufficient to load them, with only basic identification requirements, though new protections for customers against bill errors and identity theft have been built into the newest draft. Prepaid cards will also, for the most part, not require a credit check or background check the way accounts with overdraft protection (checking accounts) or credit card accounts do.

Saperstein noted that some proposals to Congress have included suggestions for much more restrictive regulations than those outlined by the CFPB.

He also noted there will still be costs for the industry.

“There’s certainly concern in the industry that the proposed rules will be costly to comply with and will certainly create an administrative burden for a lot of companies in the prepaid space.”

But according to at least one industry group, the new regulations also offer an opportunity for growth among prepaid cards.

“Once finalized, the CFPB rule on prepaid accounts will put to rest any arguments that prepaid cards, although already subject to myriad federal and state regulation, lack meaningful consumer protections,” CEO Brad Fauss of the Network Branded Prepaid Card Association (NBPCA), noted.

And this growth is entirely necessary, the NBPCA notes, given the rough 67 million Americans currently unbanked, underbanked or who have limited to no access to ATMs in their neighborhoods.

This, it seems, is a position the CFPB can get on board with.

“For consumers who do not want to, or cannot, open a checking account, the bureau believes that a GPR card could be a viable substitute,” CFPB noted in its notes on the draft proposal.

“[T]he lack of access to checking accounts and other types of more established financial products and services appear [sic] to be the key driver of their use of GPR cards.”

Remaining Disagreements 

Despite having found some common ground on the necessity of prepaid cards, there still are some kinks to work out.

“The NBPCA is concerned that overly burdensome compliance requirements could remove certain types of prepaid products from the marketplace, ultimately limiting consumer access and driving them towards riskier, less favorable products,” NBPCA’s Fauss noted. “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.”

Of particular concern is a subsection of the rules that apparently classifies any prepaid cards that cover overdrafts as a credit card. This even extends to prepaid cards that only offer overdraft in “force pay” situations, such as when a tip on a restaurant bill pushes the account into the red after the base charge of the meal has been authorized.

The NBPCA notes that, by including the “force pay” scenarios, the regulations would unfairly categorize a host of GPR products as credit cards, which would drive them from the market with compliance costs.

The NBPCA notes it is hopeful this element of the rule can be corrected before a final version is published.