The Green Sheet Online Edition
December 26, 2016 • Issue 16:12:02
The CFPB takes on prepaid
In the banking industry, when you read headlines about the Consumer Financial Protection Bureau, you may feel an immediate sense of dread. The CFPB can seem like Cousin Eddie from the movie National Lampoon's Vacation and its sequels: someone you don't really want to see, but he keeps showing up unannounced and you have no way to avoid him.
Well, the days have gotten shorter, the air has gotten cooler and, just in time for the holidays, along came Cousin Eddie (I mean the CFPB) with an appearance. The prepaid card industry has remained mostly unregulated due to ambiguities in credit and debit card laws. That was up until four years ago, when the CFPB disclosed its intention to implement regulations on prepaid accounts.
SIDE BAR:More on CFPB and prepaid
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The scope of the rules
Recently, the agency issued its Final Rule, which will go into effect Oct. 1, 2017. It governs prepaid accounts that include:
- General-purpose reloadable cards (such as cards with Visa, Mastercard, or American Express logos)
- Mobile wallets and other electronic prepaid accounts (such as PayPal and Square Cash)
- Peer-to-peer payment products
- Student financial aid disbursement cards
- Tax refund cards
- Payroll cards
- Government benefit cards
In summary, this applies to any stored-value payment mechanism that is not connected to a bank account as long as it is redeemable with unaffiliated merchants, can be used at ATMs, or can be used to conduct person-to-person transfers. The Final Rule specifically excludes:
- Gift cards
- Gift certificates and store cards redeemable at a specific merchant
- Cards given as loyalty or promotional rewards
- Payment cards associated with IRS-regulated tax savings accounts (health savings accounts and flexible spending accounts)
- Payment cards used to distribute means-tested benefits under state or local law
- Federal government store cards for making purchases at military installations
Why these regulations matter
So let's explore what exactly these regulations are and how they will affect both you and the consumers. The CFPB regulations will entail new protections for prepaid accounts under the Electronic Fund Transfer Act, as well as required consumer disclosures and credit protections that arise out of the Truth in Lending Act and the Credit Card Accountability Responsibility and Disclosure Act.
On the positive side, consumers will be made more secure by these changes once they are given greater access to their account information and more detailed fee disclosures in their card agreements. There will also be a limit to a consumer's monetary loss in the event that their cards are lost or stolen.
Of course, there are other questions and concerns for providers. For example, it is unclear how the CFPB would treat "force pay" transactions, such as when a gas station pre-authorizes a minimal amount on a card at the pump to confirm its validity.
Once the transaction is complete, the purchase amount could overdraw the account. Some uncertainties in these new rules may place such transactions in violation of regulations. Because, indeed, the CFPB may also be altering the way overdrafts are handled. Instead of allowing overdrafts for a fee as they do at banks, prepaid card providers may have to begin limiting overdrafts like credit cards.
Before that rule is enacted, the CFPB is looking into mandating banks to perform credit checks on their customers to ensure they can afford an account overdraft feature. If that is successful, they may enact the same plans for prepaid cards. As with any new regulations, consumer safety is always a priority, but we do not wish for changes that restrict people from using their prepaid cards or that create such hurdles for providers that they are driven from the market.
Ascending digital payments
The term "cash is king" is slowly moving into retirement along with the generation of baby boomers. Over the past 10 to 15 years, we have evolved into a payment technology-dependent society. With millennials taking the wheel, digital payments and cards have taken front and center as payment methods. Credit and debit cards have long been the staple in card usage, but over the past five years the industry has experienced a surge in the growth of general-purpose reloadable (GPR) cards as well.
Just how important is this industry? The numbers are pretty impressive. According to the CFPB, the amount of money that consumers put on GPR prepaid cards in 2003 was less than $1 billion. By 2012, that amount had ballooned to almost $65 billion and it is expected to reach $121 billion by 2018. These GPR cards also play to a wide demographic of users. Some are "banked," or are established with a bank and have a checking account, and others are "unbanked," consumers who do not have a traditional bank account and many rely exclusively on GPRs for their currency needs.
Research done by the Federal Reserve Bank of Boston shows that 45 percent of unbanked individuals own a prepaid card. How many people are unbanked? According to American Banker, there are nearly 68 million unbanked or underbanked Americans. Regardless of their banking status, however, the appeal of prepaid cards is easily understandable in today's society.
They are ideal for those with credit issues, convenient, often safer than carrying cash, and many people use them as a measure to help control their spending. A recent Pew Research Center survey found that approximately 10 percent of all U.S. consumers reported spending with a GPR card at least once a month.
This is a vital industry that needs to remain secure and accessible to consumers. It is also an area in which providers need to expand to meet growing needs and not be restricted into obscurity. Let's hope Cousin Eddie doesn't appear again for a while.
Brett Husak is Director of High Risk Merchant Services National Bank Services. Contact him at firstname.lastname@example.org.
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