By Patti Murphy
Some analysts believe the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 will thwart growth in prepaid debit cards. I'm not convinced. From my vantage point, it looks like a good time for banks in particular to ramp up prepaid programs.
And I'm not alone. I suspect Green Dot Corp. saw the writing on the wall last year as it awaited Federal Reserve Board approval of its bid to acquire a small Utah bank through which it now issues prepaid cards.
Granted, prepaid cards have received some bad press. But consumer acceptance of prepaid debit cards has grown at a faster clip than any prior new payment method. Plus prepaid debit, especially open-loop, prepaid debit accounts, are vital to the ongoing success of mobile payments and efforts to mainstream financially underserved (unbanked and underbanked) Americans.
Even the upscale American Express Co. has invested in the prepaid market. Last year AmEx introduced Serve, a platform that supports various prepaid applications, including e-commerce. The new prepaid platform is based on technology AmEx inherited with its 2010 purchase of Revolution Money Inc., a person-to-person payment platform. This year AmEx plans to rev up Serve by getting wireless companies to preload it as a payment application on mobile devices.
AmEx also offers a co-branded prepaid card with the retailing chain Target Corp. that incorporates features popularized with its credit cards (like purchase protection and roadside assistance), and it has been selling gift cards at U.S. Postal Service locations.
The Boston-based consultancy Mercator Advisory Group expects prepaid card sales to top $522 billion in 2012 and $683 billion in 2014, with sales of general purpose (open- loop) prepaid cards inching out closed-loop card sales for the first time in 2014. "[T]he prepaid market continues to have strong growth despite the economic turmoil and increased legislative and regulatory action," Mercator said in announcing its Eighth Annual Prepaid Market Forecast.
But Tim Sloane, Director of Mercator's Prepaid Advisory Services, cautioned that rapid growth in prepaid debit could be stymied by regulatory factors. "The future for prepaid is extremely foggy, given the uncertainties associated with the economy and how the industry will address the challenges imposed by the Federal Reserve, FinCEN and OCC," he said.
The Financial Crimes Enforcement Network (FinCEN), which operates out of the U.S. Treasury Department, issued rules last year requiring nonbank providers of prepaid cards to follow the same "know your customer" requirements imposed on banks by the Bank Secrecy Act.
The Office of the Comptroller of the Currency is a Treasury Department agency that charters and regulates commercial banks. Last June, the OCC issued a regulatory bulletin advising banks that its examiners are looking closely at prepaid debit card programs with a special focus on how banks manage risks associated with these programs.
Prepaid debit cards are exempt from the interchange rules imposed under the Durbin Amendment, but only temporarily; the exemption expires on July 21, 2012, for any prepaid debit card program that permits overdraft and monthly ATM access fees. Congress carved out the temporary exemption to coax prepaid card issuers to eliminate these fees. And there's evidence that such a trend is underway.
Congress also included language in the Dodd-Frank Act establishing a regulatory framework for prepaid debit cards. It created the Consumer Financial Protection Bureau to oversee compliance with consumer protection laws by nonbank providers of financial services. And in a public statement, the CFPB said it was closely monitoring six areas of services provided by nonbanks, including prepaid debit cards. "These are important markets," said Bureau Director Richard Cordray.
Cordray was appointed to the post by President Obama during the recent congressional holiday recess in an end-run around Senate Republicans who had been holding up a vote affirming the selection of Cordray for the post.
Some members of Congress threatened to challenge the legality of the so-called recess appointment of Cordray. It doesn't hold up as a serious strategy, though, since presidents (Democrats and Republicans alike) have been making recess appointments for as long as I can remember, and I don't recall any that ended up in litigation.
Politics aside, prepaid debit cards are debit cards, and all issuers should be held accountable to the Electronic Fund Transfer Act and Federal Reserve Regulation E. That's not the case today; nonbanks like Wal-Mart Stores Inc. and NetSpend Corp. can take a pass on the rules. That means their customers are not guaranteed the same protections as folks who purchase bank-branded prepaid cards. It is true that some nonbanks are trying to leverage consumer protection features to competitive advantage, but no one is holding their feet to the fire.
Regulatory compliance is no minor consideration for banks, and it doesn't come cheap. Federal bank examiners pour over their books regularly and grade them on compliance with consumer protection rules, including Reg E. Just over 77 percent of bankers surveyed in 2011 by the Independent Community Bankers Association of America ranked the cost of complying with new regulations (such as debit interchange rules) as one of the top three threats to their payment strategies; 26 percent said it was the single greatest threat.
Ensuring that nonbanks cashing in on the popularity of prepaid debit cards are put through the same regulatory rigors as banks should make for fairer competition. Just in case the CFPB doesn't get around to the task, a trio of U.S. senators introduced a bill which, if enacted, would extend Reg E protections to all open-loop prepaid debit card programs.
The Prepaid Consumer Protection Act (S 2030) calls for full disclosure of consumer fees when cards are purchased, limits on the types of fees that can be imposed (for example, overdraft charges), Federal Deposit Insurance Corp. coverage to protect customer deposits should a prepaid company go bust and CFPB oversight of prepaid card issuers.
It was introduced by Senators Robert Menendez, D-N.J., Jeff Merkley, R-Oreg., and Richard Durbin, D-Ill., author of the controversial Durbin Amendment. S 2030 closely follows policy recommendations put forth in July 2011 by the Center for Financial Services Innovation, a Chicago-based think tank that focuses on strategies for banking the unbanked.
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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