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The Green Sheet Online Edition

July 14, 2014 • Issue 14:07:01

Insider's report on payments:
Should prepaid companies be regulated like banks?

By Patti Murphy
ProScribes Inc.

Is the federal government out to quash the prepaid card industry? To hear some industry leaders tell the tale, that's the current situation. It seems some prepaid card companies fancy themselves bank replacements that should not be held to the same standards as regulated financial institutions. This is a realization I came to while attending the Network Branded Prepaid Card Association's Power of Prepaid show, held last month outside Washington, D.C.

Dan Henry, Chief Executive Officer of NetSpend Holdings Inc., was adamant during a point-counterpoint panel discussion that included prepaid executives, consumer advocates and a payment expert from the Federal Reserve Bank of Atlanta. It seems NetSpend has been making hay with what it calls "Cushion and Optional Overdraft Protection" that it offers to select customers.

Under terms of the NetSpend user contract, cushion protection offers a $10 cushion on purchase transactions "as a non-contractual courtesy" when a NetSpend Premier Card is used in a POS environment. There is no fee, provided the overspending is covered within 60 days. Overdraft protection is an opt-in service for customers who have at least $200 in direct deposit transactions every month; it costs $15, and cardholders have 24 hours to cover an overdraft.

Prepaid, a pathway to credit

Henry was adamant in his defense of overdraft services for prepaid cardholders. "Consumers want a pathway to credit," he said. Optional overdraft protection on their prepaid cards can help consumers with little or no credit history build credit files. NetSpend has generated "reams of data" about customers opting in for its overdraft protection, he said. About 40 percent of these transactions are fee free; 29 percent of customers said the service is absolutely necessary.

Henry produced a two-inch stack of letters he said had come from satisfied customers. He also offered to get satisfied customers to email the National Consumer Law Center and explain the value they get from being able to overdraft their prepaid cards. "You'll get so many emails, it will crash your system," he told NCLC Associate Director Lauren Saunders, who was on the panel.

Henry argued that regulation will stifle innovation in the prepaid space. He complained that consumers turn to companies like his because they can't get good deals from banks. If the government starts regulating prepaid companies the way banks are regulated, many un- and under-banked Americans will be left without an affordable banking option, he suggested.

The message I took away from this was that there are some good, consumer-friendly prepaid card companies, and NetSpend appears to be one of those. But many are not consumer-friendly. That's why the Consumer Financial Protection Bureau has a proposal out that would apply Regulation E disclosure rules to general-purpose reloadable (GPR) prepaid debit cards, and prohibit cardholders from overdrawing their accounts or to be offered other credit-like features. The CFPB is also working on consumer protection rules for short-term, small-dollar credit products, which often get lumped under the general title of payday loans.

I sympathize with Henry. It stinks to be tainted by the actions of a few miscreants. I think it's a feeling most of us have had at one time or another. I, for one, resent the long queues, searches and body scans that I suffer through every time I board an airplane. And I'm surely not alone. But it's a hassle tens of millions of us must endure because of the ever-present threats of terrorism and hijackings. I could never imagine myself hijacking an airplane. But because some people do, everyone gets tainted and we all have to get searched.

In a perfect world, none of these hassles would exist. But this is not a perfect world. Not every business is upstanding and forthcoming with customers. That includes some GPR debit card companies. And consumer protection laws are designed to protect folks from companies that might take advantage of them.

Prepaid, a way of life for many

An estimated 5 percent of the population (or 12 million adults) use GPR cards as least once a month, according to a recent survey by the Pew Charitable Trusts. These consumers use reloadable prepaid cards for a variety of reasons, Pew stated in a report on the survey titled Why Americans Use Prepaid Cards: A Survey of Cardholders' Motivations and Views. Here's a sample of user attributes identified in the report.

  • Some say prepaid cards are less expensive to use than checking accounts.
  • Some have checking accounts but use prepaid cards for various reasons, like better budgeting.
  • Many use other alternative financial services, such as check cashers, bill-payment services and payday lenders.

"What unites most of them is a desire to control spending, debt and fees," the report stated. Few of those surveyed were newbies with regards to financial services. Seven out of eight have or previously had a checking account; two out of three have or previously had credit cards. "They have turned to prepaid cards as a safe haven to avoid the risk of overdraft fees and as a commitment device, or a tool to restrict their ability to overspend or to incur interest charges," the report stated. "For most customers, prepaid cards are a mechanism to avoid the temptations and problems of the past."

That's why large numbers oppose adding credit features to their cards. Sixty-three percent said no to linked lines of credit; 69 percent said no to linking payday loans to the cards and 71 percent balked at the idea of overdraft protection for a fee. More than two-thirds of those polled said they'd prefer a transaction be declined than pay an overdraft fee. So what do prepaid cardholders want? According to the Pew survey, they'd like features that help them to build savings. Two-thirds of cardholders polled by Pew said they'd like the option to keep some of their card balances in a savings fund. Several prepaid card programs do promote savings, including Blue Bird, a prepaid card venture from American Express Co. and Wal-Mart Stores Inc.

Henry insisted savings isn't a big draw, and he's not dissuaded knowing that 71 percent of prepaid cardholders don't want overdraft protection. "We will not ignore 29 percent of our customers who need it and the 40 percent who have no emergency funds," he said, referencing internal studies.

Hmm. But wouldn't a savings feature be more helpful than encouraging bad habits like spending money you don't really have? end of article

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 patti@greensheet.com.

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