Alternative Finances

Prepaid’s Summer Of Uncertainty

It’s as quiet as a hot summer night, as the prepaid industry awaits the final ruling from the CFPB. Rules that were promised last year, then March of this year and then, mid-summer – well, it’s mid-summer and it’s crickets.

Brad Fauss, CEO of the Network Branded Prepaid Card Association and MPD CEO Karen Webster dug into the potential for these rules to create the kind of inconsistencies that could very well disadvantage the very consumers that the CFPB intended to protect.

Who Uses Prepaid Anyway?

Fauss notes that prepaid cards are a growing industry for two main groups: the unbanked/underbanked who use it as a primary financial management tool, and “millennials with money” who have bank accounts but use the cards to budget, for travel or to protect their “real” card number in digital transactions while still being able to enjoy fraud protections.

That sets up one of the biggest areas of contention from the standpoint of the prepaid card industry: the majority of users perceive and use prepaid cards no differently than a standard demand deposit account. These products are, in fact, the underpinning for pure play digital banking services offered by innovators like Chime or Green Dot.

“The lines become very blurry,” Fauss told Webster.

And when it comes to the new rules, the CFPB mostly acknowledges that “blurriness” by treating the modern prepaid product and standard DDA account as essentially similar products.

“Seventy-five percent of the rule reflects the understanding that when a consumer has that card in their hand – whether it is a prepaid card or a debit card – they expect and will get roughly the same protections.”

So far, so good.

When the rule turns to overdraft protection – Fauss says – things stop making sense.

“The CFPB makes a right hand turn and goes in the totally opposite direction.”

The CFPB’s position is that when prepaid card users overdraw those accounts, those overdrafts should be treated as credit transactions and, therefore, treated like credit cards.  That puts these products under the rubric of Regulation Z, which Fauss says was never meant to handle deposit accounts.

Regulation Z governs credit products, forcing full credit underwriting when credit is extended. That, Fauss says, makes the prepaid product both more expensive to offer and less accessible to consumers who are unbanked and likely have bad or no credit. Further, Fauss notes, that the way that the rule currently stands, the products are less broadly useful, since part of the regulation means that a consumer cannot use overdraft protection at all for 30 days. Fauss notes that is not a regulatory hurdle regular DDA accounts must clear.

“These rules simply target that unbanked or underbanked group,” Fauss notes. “The actions they are taking will hurt the consumers who actually need these products the most.”

Fauss explains that consumers are not using prepaid products to rack up massive debts – most overdrafts are repaid within 24 hours and a large number are for less than $10. It’s therefore not reasonable, or even necessary, to undergo full credit underwriting for $8 dollars worth of debt that exists for 12 hours. This scenario is no different than an overdraft in a traditional DDA account.

But, Webster asked, isn’t part of this driven by the sometimes complicated fee structure of prepaid cards – and how consumers who may be unaware of said fees unintentionally end up overdrawing those accounts because they don’t have visibility into the how the number of small dollar fees associated with transacting has eroded their balance?

Fauss said that critique has been true in the past – but not as much now since market factors have driven prices down.  And, Fauss notes, that is not industry’s unique opinion – the CFPB said as much in their report.

“The Bureau acknowledges that the competitive marketplace has brought fees down across the board. I would understand this a little better if this were five years ago, but it seems they are a little late to the game on this [point].”

Fauss says that the products that are left in the marketplace today are very consumer friendly and mostly avoid the sort of fee traps that were once associated with prepaid cards.  And those, Fauss noted, should be the products that the CFPB should set regulations around – with guardrails – as opposed to treating prepaid card products like credit products and regulating them right out of the lives of consumers who need them.

“It frankly insults the intelligence of this group of consumers. Until you walk a mile in their shoes and think like a person who can’t open a bank account.  I think the regulatory opinion is that ‘if they knew what they were doing they’d go get a bank account,’ and for some people that’s not an option. And for some consumers, especially millennials, that’s just not their choice.”

Fauss emphasized that the Network Branded Prepaid Card Association doesn’t stand against regulation – they think it helps everyone if there are clear guidelines the industry operates under.  But the regulations have to make sense – and offer some kind of parity between similar products – instead of tacitly pushing consumers away from a product that they are choosing to their benefit.

Unfortunately, Fauss says, regulating prepaid cards out of the market as a low barrier alternative to DDA accounts will not make consumers who are currently unable to get bank accounts suddenly able to get one – or make a millennial who is concerned about cyber security any more excited to use her existing debit card at a merchant POS. It will just leave consumers who either need – or just reasonably want – another option, out in the cold.

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