Todd J. Zywicki, George Mason law professor and Senior Scholar at the Mercatus Center, wrote in The Economics and Regulation of Network Branded Prepaid Cards that regulatory scrutiny of the industry has grown in proportion to the growing usage and popularity of prepaid cards, especially GPR cards that serve as checking account replacements. He said this scrutiny has focused on the fee structures of the cards.
"Yet, there is no evidence that prepaid cards are excessively expensive compared to relevant alternatives or that prepaid card customers systematically fail to understand the fees and other costs of prepaid cards or the costs of relevant alternatives," Zywicki wrote.
Given that Zywicki found GPR card fees are neither excessive nor misunderstood by consumers, the proposed solution to the problem – more regulation – is apparently not necessary. It is Zywicki's view that there is no reason to believe that "government regulation could be fashioned in such a manner as to improve market outcomes."
Indeed, Zywicki believes that the unintended consequences of regulation, as providers respond to new rules by reducing services for consumers, would have a detrimental effect on consumers, many of whom are unbanked and can least afford a reduction in alternative financial services.
Based on published studies, Zywicki's research attempts to cut through industry and consumer activist biases and draw a coherent picture of the industry. His central argument against regulation rests on the market effects of the Durbin Amendment to the Dodd-Frank Act of 2010. The amendment, which resulted in the Federal Reserve capping debit card interchange, caused banks to increase fees on checking accounts to offset losses from lower debit interchange.
Not only did the amendment swell the ranks of the unbanked, as checking accountholders could no longer afford bank accounts, but it has stifled competition in the prepaid card industry, according to Zywicki. Large banks, which have the resources to offer lower-cost GPR cards and exert pressure on industry incumbents to follow suit, may not enter the prepaid card market due to Durbin, or offer prepaid card programs with reduced functionality, he stated.
GPR card issuing banks with assets under $10 billion are exempt from the amendment. But banks with assets over that threshold can only issue prepaid cards and still remain exempt from the amendment if the cards do not provide access to funds by check, automated clearing house (ACH) or wire transfer.
"This narrow exception, which Congress intended to keep large banks from evading the Durbin Amendment's price controls by effectively converting prepaid cards into de facto debit cards, means that large banks can only offer prepaid cards with reduced functionality, and in particular, cannot offer online bill pay, recurring ACH debit (such as to pay utility bills), or funds transfer among different accounts (such [as] the transfer of funds from a prepaid card to an interest-bearing savings account)," Zywicki wrote.
Therefore, Zywicki believes the Durbin Amendment poses the biggest obstacle to increased competition and consumer welfare in the prepaid card industry. "[T]he single most effective act that could be taken to benefit consumers and market competition would be simply repeal it and allow interchange fees to be set by market forces and for debit cards and prepaid cards to compete on a level playing field," he said.
Current legislation before Congress includes the Prepaid Card Consumer Protection Act of 2011, introduced by Sen. Robert Menendez, D-N.J. Zywicki said the bill would eliminate cards with per-transaction fees (which kick in when cardholders make POS and ATM transactions) and instead impose one flat monthly fee on all prepaid cards, creating an all-you-can-eat-for-one-fee marketplace.
"Such legislation would have the negative effect of harming those consumers who use their cards lightly and for specific reasons and who, as a result, prefer cards priced on a per-transaction basis," he wrote, adding the result would be that "hundreds of thousands [of people] would pay higher fees or possibly abandon prepaid cards completely."
Zywicki stated that regulations should be enacted if they promote competition and consumer welfare, but that the available, if not conclusive, evidence suggests consumers achieve the most benefits from prepaid cards when regulations do not impose arbitrary restraints on the marketplace.
"In light of this reality, regulators should move exceedingly cautiously before taking steps that could critically harm this dynamic and evolving market that provides value and choice to millions of Americans," Zywicki said.
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