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The Green Sheet Online Edition

October 25, 2010 • Issue 10:10:02

How regulations can help prepaid

sellingprepaidWith federal and state regulators now focusing on the prepaid card industry, Mercator Advisory Group LLC hosted an August 2010 webinar that analyzed the regulatory landscape for its effects on the industry. Mercator concluded that prepaid card providers can benefit from regulation by thinking creatively about how to work with and around the requirements.

The webinar, Prepaid Regulations: A Framework for Asking the Right Questions, which arose out of Mercator Senior Analyst Ben Jackson's report of the same name, focused on possible positive outcomes of regulation.

Dodd-Frank

For example, the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits prepaid card providers from charging overdraft fees and requires free withdrawals from ATMs in certain situations, Jackson said. While those specific outcomes from the act received the most attention, two other provisions may represent opportunities, according to Jackson.

One mandate from the Dodd-Frank Act is to improve access to financial services for the unbanked and underbanked through grant programs, cooperative agreements and other initiatives, Jackson said.

"While prepaid cards are not specified in this section of the Act, the Secretary [of the Treasury] can deem them an appropriate method for helping low and moderate income people," he added.

Therefore, the prepaid industry needs to demonstrate how prepaid card programs can help those without banking relationships function as alternatives to banks in order to take advantage of federal funding, Jackson said.

Additionally, that same section of the Act (Title XII) mandates for the provision of funds for banks to operate small-dollar (under $2,500) loan programs and provide loan-loss reserves on those small-dollar loans, Jackson said. This provision is an opportunity for providers to add a credit functionality to prepaid cards, he noted.

Credit CARD Act

The final rules of The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the Credit CARD Act) were published in the spring of 2010 and began to take effect in September 2010. Regulation E of the Credit CARD Act places expiration date and fee restrictions on gift cards, as well as mandates fee disclosure requirements.

Jackson said Regulation E "will shake up the industry," but that "smart" program managers can benefit from it in the long run. Phone cards and general purpose reloadable cards not marketed as gift cards are excluded from the regulations, Jackson added. So providers can reengineer card programs to take advantage of the exclusions.

For example, new types of cards can be created, such as budgeting, online shopping and "layaway" cards, that are separate from providers' gift card programs, Jackson said. By changing the marketing, providers could create a "seemingly new business line without a lot of changes to the back office."

Additionally, rather than seeing the more robust disclosure requirements as a burden, they can be viewed as an opportunity to educate consumers on "the diverse uses of prepaid cards," Jackson advised. end of article

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