By Patti Murphy
Rather than pay a litany of fees to banks and credit unions – account maintenance, ATM and POS debit fees, and overdraft charges, for example – millions of U.S. consumers prefer the pay-as-you-go approach to using prepaid cards and other nonbank financial services. It's been a bit of a no-man's land situation with respect to consumer protections, however, as many of the federal protections accorded consumers of financial services were written for banks. Now that's about to change.
In November 2014, the Consumer Financial Protection Bureau issued an Advanced Notice of Proposed Rulemaking regarding consumer protections for general purpose reloadable (GPR) prepaid debit cards. Gift and other private label prepaid cards are excluded from the rulemaking; these cards are already covered under federal Regulation E, the CFPB noted.
The proposals – contained and explained in a 713 page document – are detailed. But here's the basic plan: extend consumer protections that apply today to bank-issued debit and credit cards to GPR prepaid debit cards. This includes the disclosure and error resolution procedures contained in Reg E (which covers electronic payments) and Regulation Z (truth-in-lending). Both sets of regulations were written by the Federal Reserve Board; rulemaking and enforcement was shifted to the CFPB under the Dodd-Frank Act of 2010.
Included in the proposal are sample uniform disclosure forms prepaid companies would have to incorporate into the sales process, whether online or in person. "Currently, each prepaid card company's retail package discloses different information in different ways," the CFPB wrote. "This can be confusing if you're trying to compare costs between prepaid accounts." The proposal also would extend the application of Reg Z rules to prepaid cards with overdraft features. Interested parties have until mid-February 2015 to comment on the proposals.
The CFPB said it was forced to act by the rapid pace of adoption of GPR prepaid cards, especially among the unbanked and underbanked who use the cards in lieu of bank accounts. "The Bureau believes that it is likely that some consumers do not realize that, under current Federal law, their prepaid accounts may offer fewer protections than substitute products," like checking account debit cards, the CFPB wrote.
A 2014 report by the Pew Charitable Trusts revealed that 5 percent of adults (or 12 million Americans) use prepaid debit cards at least once a month. According to that report, Why Americans Use Prepaid Cards, 44 percent of these regular prepaid card users do not have checking accounts; 33 percent have never had credit cards.
Pew's research also suggests prepaid card users are not interested in overdraft protection. Among those who have previously used checking accounts, 40 percent closed or lost their accounts due to overdraft fees. "Large majorities oppose features that let them overspend what's on the card," Pew wrote. "They find credit options tempting and got a prepaid card to avoid overspending." This contrasts radically from prepaid company executives' portrayal of prepaid cardholders that I discussed in "Should prepaid companies be regulated like banks?" The Green Sheet, July 14, 2014, issue 14:07:01.
The Federal Deposit Insurance Corp.'s latest research on the banking status of Americans provides a closer examination of unbanked consumers, as well as those with bank accounts. Nearly half of the unbanked surveyed have had bank accounts previously; 8.9 percent had left the banking system within the past year, the FDIC reported.
The U.S. Census Bureau has been collecting data on the banking status of U.S. households every two years since 2009. The FDIC analyzes and reports the findings in the National Survey of Unbanked and Underbanked Households. The third and most recent survey report (covering 2013) was published in October 2014.
The FDIC stated most unbanked households are using GPR prepaid debit cards obtained from nonbanks. The CFPB's proposed rule changes, if adopted, would subject these nonbanks to regulations banks have to comply with when offering consumer credit and debit products. With prepaid debit cards increasingly replacing checking accounts, it would seem to be in the nation's best economic interests to ensure consumers using the cards get the same basic consumer protections they would receive from banks.
The FDIC's report provides important insights into the financial lives of the unbanked and underbanked. For example, among households that only recently became unbanked, 34.1 percent said it was because of a significant income (or job) loss. Meanwhile, 19.4 percent of households that recently opened bank accounts reported new jobs, which made opening the accounts more practical, the FDIC said.
Fees were another common reason given for not using banks: 30.8 percent of all unbanked households said high or unpredictable account fees were a major reason for shunning banks; 13.4 percent said that was the primary reason for not having bank accounts; and 34.2 percent of unbanked households attributed their situations to a dislike or distrust of banks.
These are additional data points reported by the FDIC. All are for 2013 unless otherwise noted.
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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