Richard Cordray of the Consumer Finance Protection Bureau is expected to announce new regulations for prepaid debit cards today in Durham, N.C. Prepaid cards are a rapidly growing and relatively new segment of the market, but they don’t offer consumers the same protections that traditional banking products do. The CFPB seeks to amend this by issuing rules on fee disclosure and fraud protection.
According to the CFPB’s press release, the new rules will focus on three areas: fees and term disclosure, unauthorized transactions and other product features.
“The people who use prepaid cards are, in many instances, the most vulnerable among us,” said CFPB Director Richard Cordray, in prepared remarks. “Right now prepaid cards have far fewer regulatory protections than bank accounts or debit or credit cards. That’s why we are launching a rulemaking to promote safety and transparency in this emerging market.”
The CFPB would like to see greater uniformity in fee disclosure, given how inconsistent fees are in the prepaid space — different issuers charge for all sorts of different services, and the fees can vary greatly from card to card. Unlike with credit cards and checking accounts there is no standard fee disclosure form for prepaid cards.
Credit and debit cards, too, offer consumers certain protections from fraud and theft. Credit card companies, for example, can only hold customers liable for $50 when purchases are made with a stolen card, so long as the card is reported stolen. Some prepaid card issuers offer fraud protection, but not all do — the CFPB seeks to change this.
And finally, the CFPB is seeking public input regarding prepaid cards’ other features like connected savings accounts, overdraft protection, and the like.
The prepaid card market has been growing at 42 percent year over year between 2010 and 2014, according to the Mercator Advisory Group, and according to the FDIC, nearly one in ten American households uses the cards. The cards have grown in popularity in the wake of the Dodd-Frank Act, which contained rules that had the effect of ending free checking at most big banks; the cards are typically used as checking account replacements.
Interestingly, the press release notes that consumers don’t seem to take advantage of savings accounts connected to prepaid cards, like the high interest account that Mango offers. This calls in to question whether prepaid products can actually be the wealth-building tools that traditional banking products are — or used to be, anyway. Indeed, there have been some egregious and highly cynical attempts at success in the prepaid market, like Kim Kardashian’s Kardashian Kard and Lil Wayne’s Young Money Card, that charged steep monthly fees and offered very little to consumers in the long term. At least some cards make an attempt at helping customers save, instead of just ripping them off every month.
The market has grown up a bit, as established companies like Chase and American Express have entered the market, offering products with sensible fee schedules. Still, the market is inconsistent, and reloadable prepaid cards are frequently bought off a rack at 7-Eleven or Walmart — not at a bank, or anywhere near a financial professional. The CFPB bringing its regulatory pressure to the market shouldn’t negatively affect any responsible card issuers — although the Wall Street Journal, in the very first sentence of its story, suggests they could — but it could help push the industry toward better practices.