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The Green Sheet Online Edition

August 22, 2011 • Issue 11:08:02

Winning prepaid's PR battle with regulation

sellingprepaidThe prepaid card industry has taken several hits over the last year and a half. From the MetaBank iAdvance loan controversy, to the fee-laden Kardashian Kard, to law firms and attorneys general investigating the business practices of the industry, it seems prepaid has a public relations problem, despite its growing success. One way the industry can improve its image is through regulation, according to David Newville, Senior Policy Analyst at the Center for Financial Services Innovation.

"Every week you go online or you pick up a newspaper and you see GPR [general purpose reloadable cards] getting hammered in the news for not having deposit insurance, not having the same protections as debit cards, and part of it goes a little too far in not acknowledging that a lot of the major players are doing this, but it's also justified in a lot of ways too," he said.

The answer may be for the industry to formally adopt consumer protection standards to allay consumers' concerns. "From a consumer perspective, it will make people a lot more confident in the product and can probably enlarge the market," Newville said.

Three recommendations

A July 2011, CFSI report entitled Prepaid Cards and Consumer Protections recommends the industry:

  • Embrace Federal Deposit Insurance Corp. pass-through insurance
  • Extend Regulation E protections to GPR cards
  • Require standardized fee disclosure information

The report stated that traditional demand deposit accounts (DDAs) come with legal protections designed to safeguard account funds, namely FDIC pass-through insurance of up to $250,000 per institution for each individual account owner. However, GPR card accounts are generally structured differently – instead of individual accounts, they are held in pooled accounts, which may not afford cardholders the same level of FDIC protection per account.

While the report said most GPR card accounts come with a level of deposit insurance, it can vary from one GPR card provider to the next. The CFSI proposes all GPR card accounts be granted the same maximum level of FDIC pass-through insurance protection that DDA bank account holders enjoy.

Additionally, Regulation E, which implements the 1978 Electronic Fund Transfer Act and applies to prepaid payroll cards, should be extended to cover GPR cards as well. The CFSI said Reg E protections would lengthen the period of time transaction histories are made available to GPR card users and provide them access to ongoing paper statements, if requested.

Finally, the CFSI advises the industry to provide uniform fee disclosures in a standardized, easy-to-understand box format and have that information prominently displayed on packaging and websites. Having a limited space for fee disclosures would encourage less complex fee structures and fewer fees, according to the CFSI.

One bad apple

Newville, co-author of the report, recognizes the CFSI's recommendations constitute a burden to GPR card providers in terms of time and expense and may stifle innovation to a certain degree, as well as make it harder for newer and smaller providers to compete in the marketplace. However, the long-term benefits to the industry could be profound.

Newville said 99.9 percent of providers can maintain the highest ethical standards and yet be undermined by one prominent "bad player," such as the providers of the ill-fated Kardashian Kard.

"Whether you think it's justified or not, there's a lot of skepticism about prepaid out there in the media," he said. "It hurts everybody when something like that happens. One bad player [brings] guilt by association to the entire marketplace."

Newville asks that if companies are already providing high-level consumer protections and employing stringent disclosure practices, why not take the next step and make it official? "And so you can alleviate those legitimate concerns, not have that perception that the industry is not doing this," he said, adding that once people are comfortable the industry is doing its part, they'll say, "OK, any GPR I pick up has these regulations."

It's the equation of short-term pain versus long-term gain, according to Newville. "If you take the long view of it, versus the short-term compliance costs, getting up to speed and dealing with this, I think it will actually prove to be beneficial to the bottom line of the industry overall," he said. end of article

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