Portals and Rails, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Portals and Rails and look forward to collaborating with you.
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September 26, 2011
I can’t use my prepaid card for that now?
The focus of the Portals and Rails blog is usually related to fraud or operational risks to the payments system. Today's blog will take a look into a different type of risk, the risk of reduced functionality for general purpose reloadable (GPR) prepaid cards. An interesting development with GPR prepaid cards has risen out of the recent Regulation II (Reg II) ruling. Considering that 1.3 billion general purpose prepaid card transactions were conducted in 2009, according to the 2010 Federal Reserve Payments Study, changes affecting GPR prepaid cards could affect many people.
Reg II, which was instituted in response to the statute commonly referred to as the Durbin Amendment, has an unintended consequence. Consumers risk losing some payment functionality with prepaid cards, including the ability to have funds auto-drafted via ACH from GPR prepaid cards. The risks of unintended consequences such as this one has not gone unnoticed by the Federal Reserve Board. In fact, during the June 29 Open Board Meeting, Governor Duke expressed her concern on this topic and would eventually like the Board to "undertake a study to quantify the overall effect of this rule on consumers."
With the Reg II interchange cap set to go into effect on October 1, many institutions are implementing new checking account fees and debit card fees that will undoubtedly make checking accounts and debit cards costlier for consumers. However, outside of eliminating or reducing rewards, institutions will offer consumers the same benefits and functionality for debit cards as they did before Reg II. It does not appear that the same can be said for the functionality and convenience of GPR prepaid cards.
To be exempt from the interchange cap, a GPR prepaid card must be the only means for a consumer to access the funds on that card or the card issuer must qualify for the small-issuer exemption (assets of less than $10 billion). If the consumer can access funds on a GPR prepaid card issued by a large issuer (assets of $10B or more) with a check, ACH, wire, or other account transfer method, then the card is viewed as a "deposit account" and therefore not exempt from the Reg II interchange cap. It was critical that the regulation include this language concerning GPR prepaid cards to prevent the widespread evasion of the interchange cap by issuers labeling traditional debit cards and their underlying deposit accounts as prepaid cards.
Conceivably, a GPR prepaid card issuer could be exempt from the Reg II interchange cap by eliminating payment functionality beyond the purchasing function of the prepaid card. Under this scenario, consumers would no longer be able to use their GPR prepaid cards to auto-draft funds via ACH from the card to pay recurring bills, such as utility bills.
According to recent comments by the CEO of Green Dot, the largest GPR prepaid card program manager, "all Green Dot managed programs, including our Walmart MoneyCard program, will be exempt from interchange restrictions under the Durbin interchange amendment and therefore, our programs will not be subject to lower interchange." A recent article in the American Banker noted that Green Dot would need to either remove features of its cards or switch bank issuers (neither of Green Dot's current issuers can qualify as small) for its cards to be exempt from the interchange cap.
Implications for GPR prepaid card users
With Green Dot cards set to be exempt from the Reg II interchange cap, many GPR prepaid card users should prepare for the loss of the direct debit functionality of their cards. And with the loss of this payment option, prepaid card users that currently use their cards' direct debit functionality to pay bills will now be more at risk of making late payments and having to pay the accompanying late fees. Furthermore, because many recurring billers, including utility companies, often charge a fee for card-based payments, GPR prepaid card users can expect to pay a service fee for paying some of these bills. To avoid these service fees for card-based payments, GPR prepaid card users may be forced to make cash payments in person, which can be both inconvenient for the consumer and costly for the biller.
A final thought
Perhaps the most surprising information from the Green Dot announcement is the fact that the WalMart Money Card will also be exempt from the interchange cap. With merchants being some of the biggest proponents of the Reg II interchange cap, it's interesting to learn that a merchant cobranded prepaid card will be stripped of a feature that provides consumers with a free, safe, and convenient way to pay bills all in the name of earning the higher interchange and presumably maintaining low costs for consumers. Given the utility of GPR prepaid cards for the un- and underbanked population, will removing electronic payment functionality from the cards further disenfranchise these consumers from banks? Or would increasing consumers' cost for the product to maintain its current functionality lead this segment away from electronic payments and back to cash?
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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