New rules would boost consumer protections for prepaid cards
The nation’s top consumer financial watchdog is taking aim at the booming but lightly regulated prepaid card industry with new rules to protect customers from the vagaries of bank-like operations.
The proposal to be released Thursday by the Consumer Financial Protection Bureau would limit consumer losses to fraud and merchant mistakes, resolve errors more quickly and provide easy access to information about accounts and fees.
Companies would have to send regular account statements or let consumers see them free online. They also would have to credit disputed funds back to consumers conditionally if the investigation drags on past a to-be-determined time. Customer liability would be limited to $50 when they report fraud or a lost card promptly.
“Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts,” consumer bureau Director Richard Cordray said in prepared remarks.
“Our proposal would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment,” he said.
General purpose prepaid cards, which allow cash or paychecks to be transferred onto plastic, have become a popular substitute for debit cards. Consumers are expected to load nearly $100 billion onto the cards this year, up from $65 billion in 2012 and less than $1 billion in 2003, according to the consumer bureau.
The cards, which can be reloaded with credit, can be used to pay for goods and services, get cash at ATMs, receive direct deposits and send funds to other consumers.
Though similar to bank account cards, prepaid cards often lack safeguards that are standard on debit and credit cards and may have hidden fees, consumer advocates said. Some are not protected by federal deposit insurance — a lacking that has landed them on the advocates’ “to be avoided” lists.
The proposed rules would cover not only prepaid cards but other new payment techniques that bypass conventional bank accounts, such as mobile and other electronic prepaid systems.
The bureau also would require card issuers to provide “know before you owe” disclosure forms listing fees for services.
Those companies that extend credit by allowing consumers to spend more than the amount loaded onto the cards would have to determine that borrowers have the ability to repay the debt.
Some prepaid cards are used only as a special supplement by families using conventional bank accounts so parents can set up, say, spending limits for a college student.
But most users of the cards are economically vulnerable people without bank accounts or those the Federal Deposit Insurance Corp. has called under-banked — consumers who have a bank account but rely on nonbank products to meet some financial needs.
“Many of these prepaid consumers are living paycheck-to-paycheck,” Cordray said. “Most of them have no idea that the prepaid cards they choose to purchase are largely unregulated at the federal level and carry few, if any, protections under federal consumer financial law.”
In a report Wednesday anticipating release of the new rules, the Consumers Union advocacy group said it can be “maddeningly difficult” to locate fees for prepaid cards.
Fee charts on websites don’t always provide a full list, said Consumers Union staff attorney Christina Tetreault. The lack of FDIC insurance, for example, is sometimes disclosed only if consumers call customer service.
“Our concern is that the consumer should be protected [with account insurance] across the board,” Tetreault said. “That’s a really basic one.”
Tetreault called the protection against fraud losses and the requirement for a fee disclosure form “a great first step toward protecting consumers.”
The report by Consumers Union, an arm of Consumer Reports magazine, ranked 23 prepaid cards for value, fee accessibility and clarity, convenience and safety. Nine of the cards were not recommended.
The Bluebird card, issued by American Express and Wal-Mart Stores Inc., won the highest rating. An American Express prepaid card issued with Target Corp. came in last with a “poor” convenience rating and no deposit insurance.
In a statement, American Express said it and Target “have listened to guest feedback ... and are using those insights to build a new product designed with the Target guest in mind.” The new prepaid card would have FDIC insurance, it said.
Cards issued by Green Dot Corp. in Pasadena scored in the top half of the ratings and made the “recommended” list, with high marks for convenience and safety, lower grades for costs and some fee clarity problems. Steven W. Streit, the company’s chief executive, declined to comment.
The worst ratings went to cards issued by MetaBank of Storm Lake, Iowa, which had five cards rated “not recommended.”
MetaBank said it offers several prepaid plans and “actively coaches customers on the best plan to suit their individual needs, educating them on ways to avoid fees.”
It said ratings on websites such as ConsumerAffairs.com show that consumers are pleased with the options.
The proposed rules will be open for public comment for 90 days after they are published in the Federal Register. The proposal, including information on how to submit comments, will be available online Thursday.
The consumer bureau’s study of the prepaid market is at files.consumerfinance.gov.
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