The U.S. Public Interest Research Group (USPIRG), joined by other consumer-advocacy organizations, last week celebrated the fifth anniversary of the Credit CARD Act by calling for similar action to address fees associated with debit and prepaid cards, something opponents to such action say requires careful consideration before being acting upon by Congress.
Citing a $12.6 billion in purported annual savings the credit card legislation has provided consumers in reduced credit card fees and interest charges, the groups contend debit card overdraft fees are similarly destructive. For debit cards, the typical overdraft fee exceeds the size of the overdraft itself, the organizations said in a statement.
“At $35 per overdraft, these fees can quickly overwhelm customers, particularly when multiple fees are applied in a short period of time,” the groups said. “Even following a 2010 “opt-in” requirement intended to curb such abusive charges, [Center for Responsible Lending] research found that overdraft fees on ATM and debit card transactions cost consumers at least $5.8 billion per year.”
The CARD Act bans the biggest unfair credit card policies, including retroactive interest rate hikes and excessive penalty fees, Linda Sherry, director of national priorities at Consumer Action, noted in the statement. Now it’s time to tackle limits on fees and credit features on the other payment cards like debit and prepaid, she said.
"One of the biggest money-savers in the CARD Act was a requirement that penalty fees be reasonable and proportional; overdraft fees for checks and electronic payments should be subject to the same requirement,” added Chi Chi Wu, staff attorney for the National Consumer Law Center. “Right now, we estimate that banks make about $25 in pure profit from each overdraft fee, giving banks an incentive to push consumers into overdrafting.”
Overdraft fees should be banned on debit and prepaid card transactions, said Lauren Saunders, associate director at the National Consumer Law Center. “Debit card transactions can be denied without a fee if the account is empty, and then the consumer can decide whether to pay on credit or skip the purchase,” she said. “Keeping overdraft fees off of prepaid cards is especially important to keep those cards safe for people who have been shut out of bank accounts.”
The quickly expanding prepaid card market also requires more monitoring, the groups said. Despite the market’s rapid recent growth, there are no federal laws or regulations protecting consumers from hidden fees, expensive credit features, and other hazards, they said in their statement. Moreover, there are no requirements to clearly disclose all the costs and fees of prepaid cards to consumers. Currently, the Consumer Financial Protection Bureau is considering rules on prepaid and debit cards.
The CARD Act demonstrated that good regulation can make financial services more transparent and cheaper for consumers without reducing access, the groups noted. “Before the CARD Act passed, card issuers ratcheted down the thumbscrews on honest consumers. Increased late fees were not enough as issuers also imposed penalty interest rates on consumers who were as little as one hour late, often due to unfair practices, such as making bills due on a Sunday,” said Ed Mierzwinski, Consumer Program Director for U.S. PIRG. “By all accounts, the CARD Act is a government success story that aligned the interests of the banks with their customers.”
In a statement reacting to the consumer groups’ call for action on debit and prepaid fees, Ken Clayton, chief counsel for the American Bankers Association, tells PYMNTS.com there needs to be a balance.
“While the CARD Act has provided significant benefits for some consumers, it has also come with a downside for others – higher interest rates and reduced access to credit. This has a significant, real-world impact on people who are new to credit or who have struggled in the past and want a second chance,” he said. “Policymakers must be sensitive to potential negative consequences that future regulatory initiatives could have on the hundreds of millions of consumers who enjoy the many benefits that come with their cards.”