Regulation

Prepaid Card Regulations Looming

Prepaid cards are popular, for sure. They’re used for shopping or just to draw out funds from an ATM machine, and they’re hooked up to payment card networks. Increasingly they are becoming financial management tools that could rival having a basic checking account.

Currently about  $300 billion are loaded on to pre-paid cards of various descriptions, about twice as much as six years ago.  Uses vary. Some are given as gifts, some are bought as financial management tools, some are used to protect safety in online transfers, some are handed out by aide agencies like the Red Cross as a way to distribute relief funds during a disaster. Prepaid cards are increasingly a big – and varied – business.

Which is likely how they have drawn regulatory interest.

The Consumer Financial Protection Bureau is considering implementing a new rules that would govern how pre-paid cards are used, who uses them and what they can be usefully used for. 

The new rules would require prepaid card companies to detail fee disclosures, allow easier access to account information and limit losses if the cards are stolen or lost. Those aren’t terribly controversial changes – and market competition has already driven many firms to voluntarily adopt those measures.  It isn’t currently legally mandated – but there isn’t  a lot of pushback on mandating it

Overdraft protection regulation, on the other hand,  remains a contentious point in the regulator discussion. The new regulations would see pre-paid cards with overdraft – even in very limited capacities (a tip on a restaurant bill forces a card to “overdraw” by a marginal sum”)- regulated as though they are credit cards, as opposed to they way they are currently regulated (like they are checking accounts). Credit card underwriting is more tightly regulated with more underwriting requirements – the cost of which would drive many pre-paid cards out of business and make the inaccessible for a large part of their consumer base, lower income customers who use them instead of banking accounts.

A question still remains on “digital wallets,” including PayPal’s Venmo and Square’s Square Cash, and if the definition of prepaid cards could extend to that area of payments.

Industry leaders tend to agree regulation needs to be pursued – the lasting question is whether or not the regulations as written will stand, and if they do, if pre-paid cards as we know them will actually survive.

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