Earlier this week, the Consumer Financial Protection Bureau (CFBC) pleased all the prepaid card users by announcing its plans to standardize the fast-growing reloadable prepaid card market and at the same time protect their interest. The CFBC will accept feedbacks on all the issues related to prepaid cards till July 22 and would release the final proposal by next year.
The CFBC is seeking inputs regarding the safety of the customers’ funds. It is also aiming for clear terms related to fees and other charges that are levied by prepaid card providers. Following the imposition of the debit interchange fee (proposed by the Durbin Amendment), the U.S. banks and financial institutions have been trying to figure out different ways to recoup revenue losses. Hence, there has been surge in the issuance of prepaid cards in order to mitigate revenue losses.
The major prepaid card issuers include Green Dot Corporation (GDOT - Snapshot Report) and Netspend Holdings Inc. . However, they are now facing increased competition from big financial institutions – JPMorgan Chase & Co. (JPM - Analyst Report), American Express Company (AXP - Analyst Report), Capital One Financial Corp. (COF - Analyst Report), U.S. Bancorp (USB - Analyst Report), Regions Financial Corp. (RF - Analyst Report) and Wells Fargo & Company (WFC - Analyst Report) – who are trying to cash-in this lucrative (but still nascent) reloadable prepaid card market.
What are ReloadablePrepaid Cards?
Prepaid cards are almost similar to debit cards. The customers can refill these with their own money according to their needs. However, there is a vital difference between the two. Unlike debit cards, prepaid cards are not necessarily linked to any bank account.
The target customers for prepaid cards include those who have poor or limited credit and those who do not qualify for normal checking or savings accounts. Additionally, as the customers cannot issue checks and overdraw from their prepaid cards, the banks benefit from lower processing costs.
Other features include cash withdrawal from ATM, options to receive deposits and online access to account information. Additionally, prepaid cards can also be used for online shopping and other usual spending. This kind of a budgetary product will attract consumers who have become more cautious about spending after the recent recession and credit market crisis.
Why Regularize Prepaid Card Market?
Last year, the total amount loaded on to the prepaid cards came at $57 billion. According to Mercator Advisory Group, this amount is expected to grow at a rate of 42% per year in the next three years.
Currently, prepaid card users do not have similar protection that is available for credit and debit card users. Therefore, the CFBC wants to regularize various fees charged and other disclosures related to the prepaid cards.
Key Areas of Focus
The CFBC would be evaluating various concerns related to several disclosures and protection of the prepaid card users. There is a lack of industry-wide standards on numerous fees charged (activation fee, fees charged when money is loaded, checking balance at ATMs and speaking to customer service) along with protections (FDIC insurance) provided while using prepaid cards.
Many of the disclosures related to these are revealed to the consumers after they purchase these prepaid cards. Hence, they fail to make knowledgeable decisions while buying a prepaid card.
Further, there are no clear standards related to the features offered by prepaid card issuers. Though, prepaid cards generally do not have any credit features, many issuers offer overdrawing from their prepaid cards, small loans and savings account. Also, some of these cards provide an opportunity to consumers to improve their credit history. The CFBC will be evaluating all these features as well as related costs, benefits and consumer protection issues.
Another major concern that needs to be taken care of is prepaid card users’ liability when there is unauthorized usage of their cards. Though there are regulations related to these for credit and debit card users, similar protection is not always provided to the prepaid card users. While many prepaid card issuers extend this offer, there is no standard across the industry.
This initiative of CFBC will provide the much needed transparency to matters related to fees and features along with protection of prepaid card users. With such regularization, the prepaid card users would be able to make well-informed decision while purchasing a prepaid card.
Likewise, the prepaid card industry would also benefit from the new regulations. There would be a level playing field for all the prepaid card issuers. This could further lead to increased competition among the issuers, which in turn would be beneficial for the users in the matters of fees and disclosures.