CFPB's Treatment of ‘Force-Pay' Transactions Worries Prepaid Industry

By Gregory Roberts

Feb. 8 — A quirky kind of transaction between merchants and customers makes for a flash point between the Consumer Financial Protection Bureau (CFPB) and the prepaid-card industry, as the CFPB closes in on a final rule to extend the federal government's reach over the industry's proliferating products.

Some industry representatives at a conference in Washington last month said the “force-pay” issue could drive many leading prepaid products out of the market if it isn't resolved. But Linda Sherry, director of national priorities for the nonprofit advocacy group Consumer Action, told Bloomberg BNA, “I think it's making a mountain out of a molehill.”

John Ricci, general counsel for prepaid-card issuer Green Dot Corp., who participated in the conference that discussed the CFPB proposal on force pay, among other issues, told Bloomberg BNA, “I have a hard time believing it's going to stand.”

There's “no way,” Ricci said, that the CFPB force-pay proposal “was intended to create this.”

Neither force-pay transactions nor the discretionary overdraft protections offered by some prepaid-card issuers are now regarded by federal regulators as extensions of credit that trigger the rules governing ordinary credit cards. But that would change under the CFPB proposal, Brad Fauss, president of the Network Branded Prepaid Card Association and a conference participant, told Bloomberg BNA.

Prepaid cards can be loaded with value by consumers, companies and government agencies and used similarly to debit cards. The total amount stored on the widespread “general purpose reloadable” version of the cards grew from less than $1 billion in 2003 to more than $65 billion in 2012, the CFPB said.

The cards, frequently branded with a logo such as Visa or MasterCard, are popular with Americans lacking strong connections to banks. Those “unbanked” and “underbanked” families make up nearly three in 10 U.S. households, according to a 2013 survey by the Federal Deposit Insurance Corporation. Prepaid-card issuers typically make money off their products, which have been less extensively regulated than credit cards or bank accounts, via fees for account maintenance or transactions, rather than through interest charges or use of deposits.

The CFPB issued an 869-page proposed rule for prepaid cards in late 2014 and took comments over the next three months. The agency said it expects to issue a final proposal in the spring .

Force Pay Is Sticking Point

The term force pay describes a prepaid-card transaction that's authorized in advance by a merchant but that results in a consumer unintentionally overdrawing his balance because of the nature of the purchase. For example, a diner may hand the waiter a prepaid card holding a $20 balance to pay for a meal in a restaurant. The price of the meal is $18.50, and when the waiter processes the card, the purchase is authorized because the charge would be less than the balance. But the diner then adds a $3 tip to the card charge, overdrawing his balance.

Card companies typically do not treat the transactions as overdrafts generating extra fees or penalties, but simply make up the deficit from the next deposit the consumer loads on the prepaid card, Fauss said. Other examples of force-pay transactions include pay-at-the pump gasoline purchases, which also frequently involve pre-authorization of card use for a nominal amount, Fauss said.

Treated Like Credit Cards?

“The industry is concerned that if the force-pay transaction scenario isn't adequately addressed in the final rule, then the entire industry would have to treat every prepaid card as a credit card,” Fauss said. “The end result is that many different prepaid products may be removed from the market because of the increased cost of compliance,” he said — and this “for a product where credit wasn't intended to be offered in the first place.”

An especially daunting credit-card regulation that would be brought into play under the CFPB proposal requires the card issuer to conduct an analysis of the cardholder's ability to repay his debts, Fauss said. That regulation could be triggered even by the often-small sums involved in force-pay situations and short-term discretionary overdraft programs, he said.

“The requirement to do an underwriting for an overdraft so small would be cost-prohibitive,” he said.

Consumer Action's Sherry calls the industry's concerns a “red herring.” She recognizes that force-pay transactions are a sort of accidental effect of the payment-processing system, but she said those transactions nonetheless should be denied.

“The point of these instruments is to allow people to spend only what they have,” she said.

“It seems like if the CFPB and the industry put their heads together, they could find a way around this,” she said.

More Products Face Regulation

A separate part of the CFPB proposal that sparked industry concern at the January conference, which was sponsored by the American Conference Institute, broadens the types of prepaid cards covered under a federal regulation drawn from the Electronic Funds Transfer Act. That regulation, which has applied to prepaid cards used to pay employees and to government benefit cards that are linked to Social Security and other programs that don't involve needs-testing, would expand to cover general purpose reloadable cards, so-called reload packs and some nonreloadable cards.

The regulation also would stretch to cover mobile wallets, such as the PayPal version, that allow consumers to store value in an account on the device, but not Apple Pay, Samsung Pay and other wallets that simply load a mobile phone with information about separate credit cards or other accounts to provide the convenient use of the phone as a payment instrument.

Also excluded from the regulation in the rapidly diversifying industry would be gift cards, health savings account payment cards and loyalty or promotional cards, among others.

Dispute Resolution

What troubled the industry representatives at the January conference is the section of the regulation that governs complaint resolutions. The proposed CFPB rule would require a card issuer to grant provisional credit for a contested charge to the complainant if the dispute cannot be resolved in 10 days.

Canny and unscrupulous consumers “will find out real quick” how to “game” the system, Michael Day, a lawyer for the Blackhawk Network gift-card producer, said at the conference. Should the rule take effect for nonreloadable products such as the confusingly named reload packs used to add value to other cards, Blackhawk will get out of the reload-pack market, he said.

“Especially with nonreloadable products, there is no ongoing relationship with the consumer,” Fauss told Bloomberg BNA. “So there is heightened concern about an increase in fraud.” Such products could include, for example, an insurance settlement issued as a prepaid card, he said.

If the 10 days aren't enough to investigate and resolve a dispute on a nonreloadable card and the consumer is granted provisional credit, “The likelihood of recovering that amount, if it's a fraudulent transaction, is very little, or slim or none,” Fauss said.

The industry representatives get little sympathy from Sherry, of Consumer Action.

“Instead of whining about it, I think they should see how many people they could draw in using these products if they are well priced for families that are locked out of the banking systems,” she said. “I think there are tons of benefits in these products. There's a lot of money to be made in these products if they do it right.”

To contact the reporter on this story: Gregory Roberts in Washington at

To contact the editor responsible for this story: Mike Ferullo in Washington at