Prepaid cards are a growing segment of electronic payment that often function like debit or credit cards, but currently aren't regulated like them. The Consumer Financial Protection Bureau says it is changing that, requiring prepaid card providers to conduct some of the same credit checks and disclosures required of credit card providers.
"This rule closes loopholes and protects prepaid consumers," CFPB director Richard Cordray said today in a statement. "And it backs up those protections with important new disclosures to let consumers know before they owe."
Among other things, the rules, which take effect Oct. 1 of next year, require issuers to assess a user's ability to repay before extending credit. It would limit a user's liability in instances of unauthorized use, to $50. And, as with credit cards, it requires monthly statements and limits on late fees and other penalties to "reasonable" amounts proportional to the violation.
Part of the drive to regulate the business is its success. According to the CFPB, the prepaid card business has gone from a $1 billion industry, to a projected $112 billion in two years. They are especially popular among the 67 million Americans who don't, or can't, have traditional checking accounts. But they are also increasingly used by employers and schools to disburse payroll, benefits, or tuition reimbursements. They're also often used as gift cards, or by people who want to load a limited amount on their cards to curtail their spending.
The rules are welcomed by consumer groups who say they will protect financially vulnerable card users.
According to a survey by Pew Charitable Trusts, 45 percent of users rely on prepaid cards to avoid overdraft fees.
Brad Fauss, president of the Network Branded Prepaid Card Association, says he has several concerns about the rules. He notes there are many different types of prepaid cards, and says the watchdog agency's definition — which includes cards that are issued as one-time reimbursements, for example — is overly broad.
It's one thing to offer limitations of liability and provisional credit to consumers who use prepaid cards that can be reloaded multiple times, he says, "it's another thing to offer those same protections to what would be a one-time relationship ... with that consumer."
Prepaid cards, he says, are a low-margin business, and requiring long-form paperwork will also eat into providers' profit margins.
"Requiring credit underwriting for those consumers is going to much more challenging to offer the product," which he says will limit consumer choice.