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June 04, 2012
The new consumer protection agency looks at prepaid cards
The prepaid card industry has grown faster than many expected it to in recent years. The industry has a wide range of customers today, including not only the underbanked market but also many other market segments. In fact, in a public hearing on May 23, 2012, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray noted that while many consumers "actually have a bank account, they often use nonbank products to meet their financial needs," including the relatively new prepaid card. As this product has grown in acceptance, consumer advocacy groups have voiced concerns about the potential lack of consumer protections and the need for regulatory clarity for prepaid product providers. In response to these concerns, the CFPB announced its plan to launch a rulemaking initiative to promote safety and transparency in the prepaid market.
Why legal protections differ
While payment law critics cite the fragmented legal landscape for retail payment methods, the differences lie in the underlying mechanics. In the simplest of terms, retail payments can be segmented into three basic genres: "paying now" through a deduction in your account balance at a financial institution through either a check or debit card; "paying later" by using a credit card, which involves a loan from the payment service provider to cover the cost of the purchase in the transaction; and "paying before," by prefunding an account by the consumer for use at a later time.
These inherent funding differences lend themselves to different laws, regulations, and rule sets, since the timing and liability for maintaining the safety of the funds in each case differs. Consumer lending protection laws, for example, have relevance only for credit payment products. The emergence of new prepaid products and nonbanks participating in new business models, along with the sometimes questionable pricing schemes and fees, points to the need for industry dialogue on what new regulatory governance is needed in prepaid services today.
Growth in prepaid
The Federal Reserve’s last triennial payment study revealed that prepaid cards, particularly the general-purpose reloadable (GPR) variety, were the fastest growing retail payment in recent years, even though they represent a relatively small piece of the overall pie of preferred retail payment types. GPR cards allow the consumer—or another party, like an employer—to add funds to the card. This reloadable feature makes the product functional and convenient, and allows consumers who traditionally relied on cash to participate in the electronic economy.
Increased e-commerce is in turn leading to the use of prepaid in the mobile environment. Payment providers have been experimenting in recent years with bridge technologies such as prepaid card stickers using contactless technology. The sticker is put on the mobile handset, and is intended to influence consumer payment behavior by offering consumers the opportunity to tap their mobile phones at the merchant’s point of sale. As a result, the advanced notice of rulemaking notes that a prepaid "card" may also take the form of other access devices, such as key fobs, or even a cell phone application that accesses a prepaid financial account.
What the CFPB is offering consumers
When it comes to prepaid cards, the public hearing made it clear that the CFPB wants to make sure, first and foremost, that consumers’ funds are safe, especially because not all prepaid accounts are structured so that they are protected by deposit insurance. The agency also wants to make sure that consumers have access to clearly written disclosures on card terms and fees before they even open a prepaid account. In the hearing, the CFPB also discussed a proposal to extend Regulation E protections to include GPR cards specifically. Furthermore, the CFPB also launched "Ask CFPB: Prepaid Cards" on its website to provide consumers with information about prepaid cards in a question-and-answer format.
By Cynthia Merritt, assistant director of the Retail Payments Risk Forum
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