Ever delight at finding an old gift card in the desk drawer, only to discover that half of its value had leaked away before you could treat yourself to a night out? A new set of rules from the Consumer Financial Protection Bureau mandates improved disclosures on fees and expenses, in addition to beefing up fraud and theft protections for the growing legion of consumers who utilize debit cards and other prepaid account arrangements. The new rules go into effect October 1, 2017.
Prepaid accounts have gained in popularity in recent years, and look set to expand further particularly among Millennial consumers going forward. Industry research predicts the market for prepaid financial accounts will exceed $3 trillion by 2022, yet until recently consumer protections pertaining to fraud as well as fee transparency have lagged behind those for comparable credit card accounts. The new CFPB regulations level the field while imposing relatively minor compliance costs upon the issuing companies.
Christopher HopkinsThe panoply of products in this segment is impressive and continues to expand with additional innovation and technological advancement. Generally, this space can be categorized according to flexibility. Some debit cards are issued in lieu of a check or cash to transmit a refund, rebate or promotional payment and once the funds are spent the card becomes worthless. Most prepaid cards, however, are reloadable: additional funds can be deposited electronically at will. General purpose reloadable (GPR) cards and accounts often serve an important role as a proxy for bank accounts among households without access to more traditional banking relationships. They also frequently serve as a convenient conduit for government benefits like Social Security, supplemental income payments, and food support programs.
The new protections also apply to the rapidly growing segment of virtual payment mechanisms like digital wallets (Google Pay, etc.) and person-to person processors like Square and PayPal. Broadly speaking, the CFPB action places these non-bank banking relationships under the Electronic Fund Transfer Act that currently governs traditional checking accounts.
New disclosures. The CFPB rules require issuers to provide free and convenient access to account balance and transaction history via mail, online or by phone, unless they provide regular monthly statements (most prepaid cards do not routinely issue statements).
Consumers will also be entitled in advance to a standardized schedule of fees, expenses, inactivity charges and other variables in a format that facilitates comparison of costs across different product marketers. Beginning in October of 2018, issuers will be required to submit data to the CFPB for publication in a comparison database to assist consumers in assessing costs and benefits.
Addition Protections. Importantly, debit cards and other prepaid accounts will limit loss from theft or unauthorized use to $50, similar to traditional credit card arrangements. Issuers will be required to assist consumers in investigating disputed chargers, and to suspend the charge under investigation until the dispute is resolved (also similar to credit cards).
Credit provisions. One significant aspect of the rule changes provides customers additional rights if the prepaid account is linked to a credit arrangement to cover overdrafts. The rule establishes reasonable repayments terms, limits interest rates and requires that customers receive monthly statements.
These provisions are sensible and do not impose an undue burden upon issuers of these popular new products. Of course, it took the CFPB nearly 1,700 pages to get the job done when 17 would have sufficed. Still, consumers can feel confident that these innovative new financial products are safe to use and easier to evaluate.
Christopher A. Hopkins is a vice president and porfolio manager for Barnett & Co. in Chattanooga.