CFPB Looks at Prepaid Cards
The Consumer Financial Protection Bureau (CFPB) took the first step toward adopting consumer protections for the fast-growing prepaid card market. The bureau's advance notice of proposed rulemaking seeks input on how to ensure that consumers' funds on prepaid cards are safe and that card terms and fees are transparent.
The Advance Notice of Proposed Rulemaking on prepaid cards is available online at: http://files.consumerfinance.gov/f/201205_cfpb_GPRcards_ANPR.pdf.
The bureau also launched Ask CFPB: Prepaid Cards - a searchable online tool with easy-to-understand answers to more than 80 questions about prepaid cards. The questions cover a range of topics from a general overview of prepaid cards and their fees to how to obtain, reload, and use a prepaid card.
The bureau's rulemaking will focus on "general purpose reloadable" prepaid cards which allow consumers to load the cards with money upfront and use them as if they were checking account debit cards.
According to a 2009 FDIC study, 9.7 percent of all households used these prepaid cards. Mercator Advisory Group reports that the prepaid market totals $57 billion and is expected to grow at a rate of 42 percent per year from 2010-14. The two largest prepaid card program managers have reported a jump from 3.4 million active cards in 2009 to over 7 million this year. It is projected that the total dollar amount loaded onto prepaid cards will hit $167 billion in 2014.
Much of the growth in the prepaid market is coming from consumers who are using the prepaid card as an alternative to a checking account. The largest prepaid card program manager in the United States reported that funds directly deposited onto its prepaid cards increased by nearly 70 percent from 2010 to 2011. And the second largest prepaid card program manager reported that 42 percent of their customers had direct deposit linked to their accounts at the end of 2011.
Despite its growth, the prepaid market is still largely unregulated at the federal level. With the Advance Notice of Proposed Rulemaking, the bureau plans to evaluate several topics:
- Fees and Terms Disclosure: The lack of an industry-wide standard on prepaid card fee disclosure may make it difficult for consumers to understand the cost of the product or compare fees. Often, consumers do not know what protections or fees come along with their prepaid cards prior to purchase because such disclosures are contained inside the packaging. Consumers need to be able to comparison shop in order to make well-informed decisions. The bureau will evaluate the best way to balance the need for disclosure with the fact that many cards are purchased at retail locations and space for disclosures is limited. Consumers should also know whether or not their funds are protected by FDIC insurance. The bureau plans to evaluate how prepaid card issuers should disclose the insurance status of cardholders' funds.
- Unauthorized Transactions: Federal regulations require that credit and debit card issuers limit consumers' liability when their cards are used without their authorization. These regulations do not extend to prepaid cards. Many prepaid card issuers voluntarily offer this protection, but it is not standard across the industry. The bureau will evaluate the costs and benefits of card issuers providing limited liability protection from unauthorized transactions.
- Product Features: Most prepaid cards do not offer any credit features. In general, cardholders may not be able to withdraw or spend more than the funds loaded on their cards. However, some prepaid cards allow their cardholders to overdraw their accounts, and some offer small-dollar loans or a line of credit. Similarly, very few prepaid cards have a savings account. Even though such savings accounts typically have high interest rates, consumers do not seem to take advantage of the opportunity to save. Another feature is that of credit repair, which claims to offer consumers the opportunity to improve or build credit. The Bureau is looking for public input on the costs, benefits, and consumer protection issues related to those product features.
The public has 60 days to comment on the Advance Notice of Proposed Rulemaking. Comments are due by July 22.