The Green Sheet Online Edition
June 25, 2012 • Issue 12:06:02
Insider's report on payments
Prepaid industry rewrites Washington playbook
The prepaid card industry is rewriting the playbook for dealing with Washington. Rather than bury their heads in the sand, as many bankers did during the early stages of the debate over card interchange, these companies are aiming to get ahead of the regulatory curve.
In May 2012, the Consumer Financial Protection Bureau said it was considering whether consumer protections spelled out by the Federal Reserve Board in Regulation E pursuant to the Electronic Fund Transfer Act should also apply to reloadable prepaid debit cards. Interested parties have until the end of July to respond to the agency's notice of proposed rule-making.
Getting a jump on regulation
The Network Branded Prepaid Card Association, which convened its first annual conference in early June, is urging members to take an active role in the rule-making process.
Noting that the CFPB is encouraging consumers to share their stories about prepaid cards, Kirsten Truska, the NBPCA's President and Chief Executive Officer, urged attendees to get their satisfied customers to tell their stories, too, so the CFPB gets a balanced picture of the marketplace.
"Make no mistake, this advanced notice is a first step toward the regulation of reloadable prepaid cards," said Marilyn Bochicchio, CEO of Paybefore, an online resource for prepaid and stored-value products. Paybefore, with the assistance of a team of lawyers, put together a list of "10 Questions You Can't Afford Not to Answer" about prepaid cards and the logistics of regulation. It's accessible for free at www.paybefore.com.
"The CFPB is concerned about the vulnerability of consumers," said Romy Parzick, Manager of Innovation and Research at the Center for Financial Services Innovation. Parzick was at the NPBCA conference to introduce the Compass Guide to Prepaid, which the CFSI developed with input from regulators and consumer groups.
Two of those groups - the National Urban League and the National Foundation of Credit Counseling - joined Parzick for a panel discussion at the NPBCA event.
The Compass Guide to Prepaid is an outgrowth of a set of "aspirational guidelines" the CFSI published as its Compass Principles. The CFSI also produced a summary of the Compass Principles and the Compass Guide to Prepaid that's available for download at the CFSI website, http://cfsinnovation.com.
Bochicchio reviewed the 10 questions in detail with a panel of attorneys during a special session at the NBPCA conference. These are what I consider to be the top five:
- How should CFPB define general purpose reloadable prepaid cards?
- Should Reg E protections be applied across the board, or should the Bureau consider a new "Reg E Lite" for reloadable prepaid debit card products?
- When, if ever, should the existence or lack of FDIC insurance be articulated to prepaid cardholders?
- Should prepaid cards have overdraft features?
- What procedural changes and costs are necessary to ensure compliance with new fee and disclosure requirements?
When applied to the public comment process, answers to these questions will help regulators grasp the mechanics and nuances of the prepaid card industry. Coupled with the Compass Guide to Prepaid, this process should help fend off implementation headaches when new regulations take effect.
Had banks taken proactive steps like these in the run up to the Durbin Amendment to the Dodd-Frank Act of 2010 and the Fed's subsequent debit interchange rules, the outcome may have been quite different.
Looking at prepaid's future
"We are at a critical moment in the growth of the prepaid market," CFPB Director Richard Cordray said at a May 2012 field hearing on prepaid. "We want good practices to be instilled early on so that as the market grows, it does so responsibly."
Cordray conceded some of the disclosure requirements the CFPB is considering could be challenging when prepaid cards are packaged and sold at retail stores "where space is at a premium." But he pointed out that "consumers need to know this information so they can make the comparisons necessary to shop around and reduce surprises by understanding the true cost of the product."
An estimated 35 million U.S. consumers (or about 15 percent of the adult population) have used reloadable prepaid debit cards in the past 12 months, Cunningham noted. And it's not just the unbanked population either.
"People with bank accounts [who] use prepaid cards do so because there's something they're not getting from their traditional banking relationships," said Anu Shultes, General Manager, Financial Services at Blackhawk Network.
Cy Richardson, Vice President for Housing and Community Development at the NUL, said, "Many of the folks who are leaving banks are doing so because of a deep distrust of financial institutions."
Aite Group LLC coined the phrase "de-banked segment" to describe consumers who are leaving banks for prepaid cards. Madeline Aufseeser, a Senior Analyst at Aite, said 60 percent of the de-banked population reported leaving their banks over fees; 20 percent said they were looking for convenience; and 75 percent of prepaid cardholders said they're happy with their cards.
According to Lisa McFarland, Head of Consumer Prepaid Products at Visa, 61 percent of consumers who use Visa prepaid debit products have bank accounts. McFarland also referenced 44 million "on the rise consumers" considered to be prospects for prepaid cards. These are younger families with dual incomes who own their homes but are otherwise debt averse.
Numerous studies point to continued growth in prepaid - at an anticipated rate of about 40 percent a year between now and 2014, when consumers are expected to load $167 billion onto prepaid debit cards. Last year, Americans loaded about $80 billion onto prepaid cards, according to the Fed.
Not surprisingly, the rapid growth of prepaid cards has raised concern among consumer advocates. Gail Cunningham, NFCC Vice President for Membership and Public Relations, said her group is troubled by the growth numbers in prepaid debit, in part because so many people have poor money management skills.
Cunningham said that according to the NFCC, the number of U.S. consumers who admit to not paying their bills on time rose 5 percent last year; just over 40 percent give themselves grades of C or lower in terms of their grasp of personal finance.
"We need more education around prepaid cards," Cunningham told prepaid mavens attending the NBPCA event.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at firstname.lastname@example.org.
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