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By Jeff Bater
Oct. 5 — Federal consumer protections common to debit and credit cards will apply to broad sections of the prepaid card market for the first time under a new rule from the Consumer Financial Protection Bureau.
The agency completed a rule Oct. 5 that requires prepaid products to make more detailed fee disclosures and allow consumers to have easy access to their account balances and transaction history. The final regulation, effective in October 2017, also sets limits on customer losses in case of lost or stolen cards.
The requirements will apply to a rapidly growing and diverse set of products used by 23 million adults each month, according to the Pew Charitable Trusts’ consumer banking project. The rule covers general purpose reloadable cards that carry payment network brands such as Visa or MasterCard, as well as mobile wallets, person-to-person payment products, and other electronic prepaid accounts that can store funds.
“Our new rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone,” CFPB Director Richard Cordray told reporters during an Oct. 4 call previewing the rule.
The final rule comes nearly two years after the unveiling of the proposal, which drew more than 65,000 comments. Digital wallets capable of holding funds, such as PayPal and Google Wallet, pushed back against regulation, which they said could stifle the development of digital wallets (152 BBD, 8/7/15).
But the CFPB, in a 1,689-page rule, said it thinks that digital wallets that can hold funds operate in large part in a similar manner to physical or online prepaid accounts. A consumer can load funds into a digital wallet, spend the funds at multiple, unaffiliated merchants or conduct peer-to-peer transfers, and reload the account once the funds are depleted.
“The bureau believes that consumers who transact using digital wallets deserve the same protections as consumers who use other prepaid accounts,” the agency rule said. “Indeed, as with other prepaid accounts, a consumer’s digital wallet could fall victim to erroneous or fraudulent transactions.”
The CFPB said that while most digital wallets available today do not typically charge many fees, the industry practice is subject to change. “If fees do become standard in this space, consumers ought to know what those fees are and when they will be imposed,” the agency rule said.
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.
“Before today, however, many of these products lacked strong consumer protections under federal law,” Cordray said during the press call on the rule. “Our new rule closes loopholes and protects prepaid consumers when they swipe their card, shop online or scan their smartphone.”
The Electronic Transactions Association (ETA), an industry group representing payments and technology companies such as PayPal and MasterCard, issued a statement saying it had concerns over the rule.
“Despite recognizing that prepaid accounts are among the fastest growing consumer finance products, particularly among low to moderate income Americans, the CFPB today imposes unnecessary regulations that will limit or even eliminate valuable services for the underbanked,” said Scott Talbott, senior vice president of government relations for ETA. “We will study the details of today’s massive rulemaking document, and we remain concerned that the CFPB has prioritized regulation over innovation.”
Cordray acknowledged many prepaid companies already offer protections to customers, but pointed out the rule fills gaps in the law for consumers. “The rapidly growing ranks of prepaid users deserve a safe place to store their money and a practical way to carry out their financial transactions,” he told reporters.
CFPB cited figures showing considerable past — and future — growth in the prepaid market. The amount consumers put on general purpose reloadable prepaid cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012. The total dollar value loaded onto these prepaid cards is expected to nearly double to $112 billion by 2018, according to the agency.
Under the rule, if a prepaid card is lost or stolen, consumers’ responsibility for unauthorized charges is held to $50, as long as prepaid companies is promptly notified.
Prepaid cardholders must be given access to two fee disclosure forms: one short and one long, with easy-to-understand terms. The short form highlights key information, including the fees most important to those shopping for a card. The CFPB, in an example of a short-form disclosure, said shoppers at retail locations will find the form on the back of the card packaging, while consumers who apply for a prepaid account online will receive the form electronically.
The long form includes a complete list of fees. The CFPB said most consumers will receive the long form, along with the short form, before opening the prepaid account. When shopping at retail locations, consumers can access the long form online and by telephone before they make a purchase by visiting the website or phone number included in the short form.
The rule requires account issuers to post on their websites the prepaid account agreements they offer to the general public — a provision meant to make comparison shopping even easier.
Aside from loss limits and disclosures, the rule provides that prepaid companies must make certain account information available for free so consumers can have access to account balances, transaction history and fees they’ve been charged.
Under the rule, financial institutions must cooperate with consumers who find unauthorized or fraudulent charges, or other errors, on their accounts to investigate and resolve those incidents in a timely way.
Under the rule, prepaid account issuers must give consumers protections that are similar to those on credit cards if consumers are allowed to use certain linked credit products to pay transactions that their prepaid funds would not fully cover.
For instance, prepaid companies, like credit card issuers, must make sure consumers have the ability to repay the debt before offering credit. In addition, prepaid companies will be required to give consumers at least 21 days to repay their debt before they are charged a late fee.
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.
“These protections are for consumers who want the option to access credit in the course of conducting transactions with their prepaid cards so that they can spend more money than they have in the prepaid account,” Cordray said.
Brad Fauss, who runs a trade group for prepaid accounts, expressed concerns with the rule and predicted it would hurt consumers.
“Instead of fostering financial innovation and inclusion, the CFPB’s rule will ultimately limit access to an essential mainstream consumer product that helps millions of Americans participate in the digital economy, affordably manage funds, and safely hold money,” Fauss, president and CEO of the Network Branded Prepaid Card Association (NBPCA), said in a statement.
Fauss said the CFPB's rule is so broad that it encompasses many of the more than 15 different types of prepaid cards in market, some of which likely will not withstand the increased costs of compliance. Furthermore, the final rule maintains the requirement to provide multiple similar, but not quite identical, fee disclosures which will likely serve to only further confuse consumers, he said.
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