Standardized fee chart makes it easier to compare costs
Users of prepaid debit cards, digital wallets and person-to-person payments will be covered by most of the same protections that apply to bank accounts, under a broad new rule finalized Wednesday by the U.S. Consumer Financial Protection Bureau.“This rule closes loopholes and protects prepaid consumers when they swipe their card, shop online or scan their smartphone,” CFPB Director Richard Cordray told reporters in announcing the prepaid regulation.
Prepaid accounts – which are increasingly used alongside traditional bank accounts or as a substitute for them – will be safer to use and easier to understand, the agency said. Among the major provisions of the prepaid card regulation are:
- Fee disclosures. Cards sold at retail must come with a standardized fee chart, making it easier to compare costs before buying. The required disclosures include monthly fees, ATM withdrawal and balance inquiry fees, cash reload fees, customer service and inactivity fees, as well as the cost of buying the card itself. In addition, a complete “long form” list of fees must be available online or on request by telephone.
- Loss protection. Customer responsibility for charges on a lost or stolen card is limited to $50, if reported within two days of discovering the loss or theft. Disputes about billing errors or fraudulent charges must be investigated. The investigation can last up to 10 days to 20 days in most circumstances, or up to 45 days if the card issues a provisional credit for the disputed amount. The customer’s account must be permanently credited for charges found to be unauthorized or erroneous.
- Free access to information. While consumers may still pay balance inquiry fees at the ATM, they can get their balance for free online or by phone, or on written request. An exception is for accounts that receive periodic statements by mail – which is rare for prepaid cards.
- Limits on overdraft costs. Cards that allow users to borrow by overdrafting their prepaid funds must follow rules that apply to credit cards. For example, they must limit fees to 25 percent of the credit limit in the first year and give users 21 days to repay before charging late fees. Overdraft cards must also assess the user’s ability to pay before granting credit, and provide monthly statements that spell out the balance owed, fees and interest rate. However, cards can provide a small, interest-free overdraft cushion of up to $10 and remain exempt from the rule.
Limits of the rule
The rule stops short of requiring federal deposit insurance that secures funds kept in banks, although most cards provide the insurance anyway. Nor does it fight system outages of the sort that left thousands of RushCard users cut off from their money for several days in 2015.
“Unfortunately, no amount of rulemaking can create a force-field around providers and systems to categorically prevent [outages] from happening in the future,” Kristine Andreassen, senior counsel at the agency’s Office of Regulations, said during a press call.
The final rule was initially set to take effect Oct. 1, 2017, but has been extended for 18 months to April 1, 2019 since being published in October 2016. The initial prepaid card rule was announced in 2014.
What is covered?
The rule covers “general purpose reloadable” debit cards, which can be loaded with cash and used like bank debit cards to make purchases at merchants that accept payment networks such as Visa and MasterCard. It extends regulatory protections that implement the Electronic Fund Transfer Act and Truth in Lending Act.
Cards issued for employer payroll accounts and government benefits are also covered by the rule, although they are already subject to some bank account-type rules such as loss protection and error resolution. Campus debit cards used by colleges to disburse financial aid are also covered. Gift cards that cannot be reloaded are exempt from the rule.
Some prepaid accounts don’t come with cards at all, but are still covered by the rule. Digital wallets such as Google Wallet and person-to-person payment systems such as Venmo don’t need plastic to operate, but they can be used to store consumers’ funds. As such, they must provide up-front fee information to users and, like other prepaid accounts, the newcomers must post account agreements on their websites. The accounts must also provide the same protections for billing errors and unauthorized transactions as other prepaid accounts.
The rule comes amid booming use of prepaid cards. The amount loaded on general purpose prepaid cards is projected to grow to $117 billion in 2019, from $65 billion in 2012, according to figures from Mercator Advisory Group quoted in the CFPB rule.
“The rapidly growing ranks of prepaid users deserve a safe place to store their money and a practical way to carry out their financial transactions,” Cordray told reporters.
The Network Branded Prepaid Card Association said the rule will result in less choice for consumers by choking off the growth of prepaid products. The agency’s “overly broad” definition of prepaid accounts sweeps up 15 different types of cards, “some of which likely will not withstand the increased costs of compliance,” association president Brad Fauss said in a statement.
In particular, cards that allow users to borrow by overdrafting their prepaid funds may leave the market, he said, just as such borrowing is popular because of fluctuations in consumers’ income. NetSpend, one of the few debit card providers that offers overdraft lending, has said the provisions may “make offering such services for consumer short-term liquidity needs impractical, if not impossible,” in comments about the rule as it was proposed in 2014.
Consumer advocates would not mourn the loss of overdraft debit cards, arguing that prepaid accounts should be a safe haven from debt problems that hound other financial products.
“The CFPB should ban overdraft fees entirely,” National Consumer Law Center Associate Director Lauren Saunders said in a statement.
The consumer advocacy group applauded the rule overall, saying it will enhance protections for consumers and improve transparency of prepaid card fees. The rule also reiterates previous guidance that employers cannot require workers to be paid via debit cards, which may be laden with fees, and must offer an alternative form of payment.
However, customers should not have to pay to find out their account balances at ATMs, or when they call customer service for help, she said, naming two practices that remain permitted by the rule. “We hope that prepaid card companies will eliminate fees for calling customer service and checking the balance at an ATM,” Saunders said.
Extensions delay, reduce protections
The rule has been extended twice after it was finalized. The first extension, of six months, was announced in April 2017. A further, one-year extension followed Jan. 25, 2018. The additional time is to help card issuers comply with the rule, particularly to accommodate changes in packaging for cards sold at stores, the consumer bureau said in announcing the additional year.
The bureau also limited fraud and error protection benefits to cards that have been registered. In the rule’s previous version, cardholders were eligible for benefits if they registered their account after being affected by fraud or errors.
A third change announced Jan. 25 will make it easier to link digital wallets that store funds, which are prepaid accounts, to credit cards, without losing the federal protections that cover credit cards, according to the consumer bureau.