Have you ever sent a friend money through Venmo or sold an item online through eBay and had the transaction processed through PayPal?
Both companies face stricter rules and greater liability for fraud, loss, and account errors now due to new Washington regulations. However, prepaid debit cards face the brunt of the 1,689 pages of new financial regulations and they will affect low-income and unbanked communities most.
The Consumer Financial Protection Bureau (CFPB) just finalized rules for companies that offer prepaid services to provide greater transparency in fee structures and user agreements, place limitations on credit offerings, and force companies to be more responsive to customer complaints.
It wouldn’t be surprising if the rules were derived with the aid (i.e., lobbying) of bigger companies. And the regulations may adversely affect low-income families who are the prime users of prepaid cards.
Companies have less than a year to comply as the rules are effective October 1, 2017 compared to the 18-24 months of lead time companies requested.
The Hill reports:
Under the rules, companies are required to provide consumers with two easy-to-read fee disclosures — one short and one long — and post the prepaid account agreements they offer online.
Companies that offer consumers the ability to use credit when they lack the funds to pay for a transaction must make sure customers have the ability to repay the debt and provide regular statements.
Though consumer groups called for an all-out ban on late fees, the Consumer Financial Protection Bureau will instead require companies to give consumers at least 21 days to repay the debt before charging any late fees, as previously proposed.
The 1,689-page rule, however, caps fees for credit features at 25 percent of the credit limit in the first year and forces companies to wait 30 days after a prepaid account is open before offering any credit.
It also bars prepaid card companies from automatically seizing a credit repayment the next time a prepaid account is loaded with funds.
Pre-paid debit cards are popular alternatives to checking or credit accounts. Individuals load cash into the cards and use them for basic banking functions like shopping, paying bills, withdrawing cash, and even saving. According to Pew, about 23 million Americans regularly use this reloadable cards. More than a quarter of these are Americans who didn’t have a bank account and they are mostly from black and Hispanic communities. Some 80 percent of unbanked prepaid cardholders have annual household incomes below $50,000. Interestingly, many of them use prepaid cards as budgeting balancing tools to control their spending.
The rules come in response to a highly publicized controversy over the RushCard, a prepaid card backed by hip-hop mogul Russell Simmons, that suffered a massive technical glitch last year which left thousands of customers unable to access their funds (for weeks in some instances).
The new rules will also hit popular electronic and mobile payment sites such as PayPal and Venmo.
While one of the biggest providers of prepaid cards claims to “embrace” the new regulations, smaller groups are not as pleased. A prepaid card association, the Network Branded Prepaid Card Association, is concerned that the new rules are particularly burdensome to smaller issuers of prepaid cards and suggests that it will limit the options available to those they are meant to serve:
“Instead of fostering financial innovation and inclusion, the CFPB’s rule will ultimately limit access to an essential mainstream consumer product that helps millions of Americans participate in the digital economy, affordably manage funds, and safely hold money.”
Low-income families need choice and access to financial services. Prepaid cards are a great way alternative to other services like check cashing places that sometimes charge usurious fees.
Whether these new CFPB rules will aid in making the transactions easier and financial situations of user betters will have to be seen. Providing transparency in fees is helpful and welcome.
However, we can imagine unintended consequences arising (such as companies charging higher fees in other ways to cover new liabilities). There will be administrative costs attached to compliance as well that may get passed on to consumers.
New regulations don’t just happen in a vacuum, they have effects that bureaucrats in Washington could never imagine. We’ll just have to wait to see them play out.