On May 23, 2012, the Consumer Financial Protection Bureau (CFPB) officially launched its prepaid card initiative. In addition to issuing an Advance Notice of Proposed Rulemaking (ANPR), the CFPB hosted a field hearing in Durham, North Carolina, on general purpose reloadable prepaid cards, a rapidly growing segment of prepaid cards. Current and entering industry members are strongly advised to educate themselves on the imminent regulatory changes to the prepaid card ecosystem and actively participate in the CFPB’s new initiative.
North Carolina Congressman David Price introduced CFPB Director Richard Cordray, who provided a brief overview on the current state of prepaid cards. Two panels representing industry experts and consumer and civil rights advocates were asked to briefly comment and then the floor was opened to the public. In his opening remarks, Director Cordray noted that more than 7 million Americans currently use prepaid cards. Prepaid cards offer services ranging from general purpose reloadable use to government disbursements, payroll, employee benefits, health care, and gift giving. They are particularly popular among the 9 million U.S. families who lack any type of checking, debit, or credit cards, colloquially referred to as “unbanked,” and the 21 million “underbanked” who have bank accounts but heavily rely on nonbank products such as prepaid cards and payday loans. According to the two largest program managers of prepaid cards, the number of active cards in use increased from 3.4 to 7 million in the past three years, and is estimated to grow by 40% each year through 2014. Industry analysts predict $167 billion will be loaded onto prepaid cards in the next two years. Though they operate similarly to a debit card, prepaid cards are not linked to a bank account and are outside the reach of federal consumer protections applicable to debit and credit cards. Further, consumer protections such as redress for theft, loss, or unauthorized charges vary from program to program, and many prepaid card services lack clear disclosures of overdraft fees and surcharges.
In light of these shortfalls, Director Cordray identified safety and transparency as the two key goals of the CFPB’s new initiative. Echoing these sentiments, panelists and audience participants collectively recommended that the following practices be implemented: expanding the current regulatory framework for credit and debit cards to prepaid cards; imposing FDIC insurance requirements; and mandating clear, standardized disclosures for fees and surcharges. Other recommendations included complete prohibition of practices such as overdraft fees, credit product tie-ins, and arbitration clauses. Though panelists and community participants emphasized the potential abuses in the prepaid card ecosystem, a number of notable advantages were identified. This included the prepaid card’s convenience and utility in budget-monitoring. Some panelists suggested that the CFPB do more to use prepaid cards as a vehicle for the unbanked and underbanked to gain access to traditional financial services like checking and savings accounts. In those instances, prepaid cards could provide financial products to the underbanked community at very low costs. Though the current lack of regulation and unbridled abusive practices weaken the value proposition of prepaid cards, panelists and audience participants expressed optimism in the creation of a stronger, more robust financial product.
The CFPB concluded the hearing by asking that consumer experts, industry stakeholders, and the public continue the conversation by submitting comments on the ANPR on or before July 22, 2012.
Written by Christie G. Thompson.