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July 8 — The Consumer Financial Protection Bureau's (CFPB) forthcoming rules on prepaid cards could strengthen an industry that's already expanding, with that surge concentrated among younger consumers supplementing their banking accounts, consumer advocates say.
“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 reservations about the rules, the industry, at least to some extent, agrees.
“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), an industry group, wrote in an e-mail to Bloomberg BNA.
Advocates, industry representatives and the CFPB all see an opportunity for the humble prepaid card to provide tens of millions of Americans who lack bank accounts with many of the key financial services banks routinely deliver.
“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.
But although a larger percentage of unbanked consumers use prepaid cards compared to their banked counterparts, most of the uptick in prepaid-card use is fueled by consumers who already have conventional bank accounts. The trend is most notable among consumers under 50, with a particular concentration among millennials, multiple surveys show.
A Pew survey found that between 2012 and 2014, use of “general-purpose reloadable” (GPR) cards rose by more than 50 percent, to where nearly 10 percent of U.S. consumers reported using a GPR card at least once a month. Use by the unbanked population changed little over that period, while utilization nearly doubled, from 4 percent to 7 percent, among those with checking accounts, the survey found.
Those banked consumers employ the cards in a variety of ways, such as a tool for budget control in an expense category — putting $100 on a card to serve as a month's entertainment allotment, for example — or for use by a child away at college.
The CFPB is expected to publish its final regulation this summer, nearly two years after it proposed rules for the cards. The rulemaking should help consumers understand prepaid products better and feel more confident about their safety, Saunders said.
The proposed rules “could have been a lot worse,” Craig Saperstein, a lawyer with Pillsbury Winthrop Shaw Pittman LLP, said at an industry conference in Washington in April.
Saperstein, a former Democratic congressional staffer whose firm represents prepaid industry participants, told Bloomberg BNA that past discussions in Congress have included suggestions for much more restrictive regulations than those outlined by the CFPB.
Nonetheless, he said, “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.”
GPR cards provide many of the features of conventional bank accounts. They can be used to make payments, both at the point of sale and online for bills or purchases, and they can receive electronic payments, from employers and others. Cardholders can add money to them, either via cash at retail outlets or online. Some cards allow cardholders to order paper checks for mailing to recipients.
Money stored on the cards generally is protected by federal deposit insurance, which is passed through to individual cardholders from the bank that holds the funds in a pooled account and is the ultimate issuer of the card. Almost anyone can acquire a prepaid card with the cash to pay for it, although reloading the card requires providing basic identification information, and the proposed rules also tie protections against billing errors to customer identification.
Unlike credit cards or checking accounts with overdraft protection, prepaid cards do not entail examination of a consumer’s borrowing history and creditworthiness.
Prepaid cards “are particularly appealing to the approximately 67 million Americans who are unbanked or underbanked, who have limited or no access to ATMs in their neighborhoods, cannot meet the eligibility or minimum balance thresholds required to quality for traditional bank accounts (e.g., checking and savings accounts) or simply do not want a traditional bank account,” the NBPCA wrote the CFPB in a 2015 letter commenting on the proposed rules.
In the proposal itself, the CFPB writes of unbanked prepaid-card holders, “[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.”
Elsewhere in the proposal, the CFPB says, “Thus, 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.”
In his e-mail, Fauss wrote, “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. 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.”
The association thinks the CFPB goes too far with several elements of the rules:
• The outlined rules take in too many kinds of prepaid cards and should be limited to cards that consumers can use as their main vehicle for financial transactions, similar to a debit card linked to a bank account. Protections against billing errors, by which consumers get credit for a disputed amount until the issue is resolved, should be restricted to holders of cards that have been reloaded and with whom the issuer has developed a relationship.
•The rules also would seem to classify as credit cards any prepaid cards that cover overdrafts; prepaid cards that do so only 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, should not be subject to that classification, which requires creditworthiness evaluations and detailed account statements. Industry representatives are hopeful the forthcoming version of the rules will address their concerns over force pay; if not, many if not most GPR cards would fall into the credit-card category, which could drive them from the market, they say.
•The rules call for a printed summary of the main fees and charges for the cards to be included in retail packaging, which the association supports, and also for a more extensive listing of other possible fees, which the association thinks is unnecessary.
The CFPB has not set a date for formal publication of its final proposed rules, which could come as early as this month. The bureau has suggested that the final rule take effect nine months after publication in the Federal Register, but the association thinks that's too soon.
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