The use of prepaid cards has exploded over the last decade or so — in 2003 consumers put less than $1 billion on prepaid cards annually, but by 2012 that figure had grown to $65 billion and by 2018 that figure is projected to reach as much as $121 billion. The user base of prepaid cards has grown significantly as well.
The cards are largely associated with the 10 million or so unbanked families in the U.S. as one of their primary tools of financial management — since prepaid cards can be used in ways essentially analogous to debit cards for payments, funds storage, cash-outs at ATMs or receipt of salary. However, the cards have expanded in popularity among consumer groups that are thoroughly banked and who are using the cards as a funds-management tool or to send to money to a third party (a college-aged child, for example).
As one might expect of a financial product that has so rapidly become so widely popular, the prepaid card industry managed to catch the attention of the Consumer Finance Protection Bureau, which has been considering new regulations for some time that would create "strong federal consumer protections for prepaid account users."
And as of this morning, those new rules for prepaid products have been finalized. They cover traditional prepaid cards (including general purpose reloadable cards) mobile wallets, person-to-person payment products, and other electronic prepaid accounts that can store funds. Other prepaid accounts covered by the new rule include: payroll cards; student financial aid disbursement cards; tax refund cards; and certain federal, state, and local government benefit cards such as those used to distribute unemployment insurance and child support.
"Our new rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone. And it backs up those protections with important new disclosures to let consumers know before they owe." CFPB director Richard Cordray noted in remakes released along with the new rules this morning.
Cordray further noted that the CFPB's new rules are the first set of such robust rule making at the federal level.
"Many of these important protections stem from the Electronic Fund Transfer Act, and they are intended to be similar to those for checking account consumers."
The Expected Stuff
Going forward, in many regards pre-paid customers will be treated like checking customers — which means financial institutions must make certain account information available for free by telephone, online, and in writing upon request, unless they provide periodic statements (prepaid products rarely offer statements) so that customers have a reasonably transparent view into their transaction history and product's fee structures. Prepaid card operators are also required to investigate fraudulent or unauthorized charging — and to resolve these incidents in a timely way (or provide a consumer credit until they can) — and protect consumers from liability for fraudulent transactions above $50.
The new rules also outline “Know Before You Owe” provisions that require an upfront and easy-to-understand disclosure of fees. It also requires publicly available card agreements so that customers have some reasonable ability to comparison shop. Additionally, with a few exceptions, issuers must submit all agreements to the CFPB, which intends to post them on a public, Bureau-maintained website at a future date.
These provisions are not likely to cause much stir — most card companies have adopted some variation on many of these already, mostly due to market pressures in a rapidly expanding and competitive space. They are also in line with recommendations of many industry players in pre-paid card products who are generally supportive of clear rules as a legitimizing force in their industry.
But not all the changes are likely to net quite as much applause this morning — there will likely also be some questions.
The new rule includes stronger rules for prepaid products that allow consumers to overdraft or otherwise payout more than they have in their account. According to the CFPB's report these protections are derived from Truth in Lending Act and the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) and will in some sense treat prepaid cards much like credit cards.
"These protections include underwriting requirements, detailed periodic statements, limitations on late fees and charges, and restrictions on the amount of fees that can be imposed in the first year that the credit is extended," Cordray said of the expanded protection. "To further separate prepaid accounts and any credit feature that is offered, companies must observe a 30-day waiting period before offering such credit to newly registered prepaid consumers."
Some of the changes likely won't cause much of a stir — reasonable time to pay overdraft charges, "reasonable and proportional" fees, a transparent structure and providing account statements are all within current industry practice. But the underwriting requirements — particularly those that require pre-paid issuers to assess a customer's ability to repay — will likely cause some stir, since as prepaid operators have noted through out the rule making process, the cards they offer are functionally much more like debit cards with overdraft than credit cards. The requirements add expense to the process, without adding any real protections, prepaid companies note — because most of the "credit" extended by prepaid companies is of the less than $50 variety and usually smaller, often brought on by a slight overdraw due to unaccounted for tipping at a restaurant.
Also likely to cause a ripple today as the news of the finalized rules spreads: the effect of the new rules on the various digital players subsumed under the regulations like Google Wallet and PayPal's Venmo. The new rules — despite both Google and PayPal's objections — cover "digital wallets capable of person-to-person transfers and storing funds." Analysts also suspect that Square Inc.’s Square Cash and Dwolla’s payment tool will also fall under the new rules.
Wallets like Apple Pay — which simply store payment credentials issued by banks — will not fall under the new rule.
A PayPal spokesman told The Wall Street Journal that the company plans to “make any required adjustments” to its business after a review of the final rules — and emphasized PayPal's commitment to transparency and openness.
Google also agreed to comply before the final rule was released today — albeit in a less chipper sounding manner, noting that “overregulation would unnecessarily stifle this emerging market." They also requested the CFPB “tread lightly” in regulating them.
The CFPB seems to have declined the request, writing in the final rule that it was not “persuaded” by the digital wallet companies’ objections to their inclusion.
“The bureau believes that consumers who transact using digital wallets deserve the same protections as consumers who use other prepaid accounts,” the agency said. “Indeed, as with other prepaid accounts, a consumer’s digital wallet could fall victim to erroneous or fraudulent transactions.”
Should be a full day of completely reasonable opinions on this subject. Or not.
Either way, we'll keep you updated through out the day.