Americans who use a fast-expanding array of prepaid cards for everyday transactions such as shopping, withdrawing money from ATMs and receiving pay or government benefits are getting new federal protections.
The rules, which will be announced Wednesday and take effect in October 2017, will make fees clearer, limit fraud losses and place restrictions on card issuers when they extend credit to users.
In finalizing regulations proposed nearly two years ago, the Consumer Financial Protection Bureau is taking aim at a booming industry that has sprung up as a popular alternative to cash and conventional checking accounts for low-income Americans.
The new rules will apply broadly to prepaid and reloadable accounts, including electronic wallets and apps that allow person-to-person payments, such as Venmo, the CFPB said.
"Many consumers rely on prepaid cards to make purchases and access funds, but until now they were not guaranteed strong consumer protections under federal law," said Richard Cordray, the consumer bureau's director.
"This rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone," he said. "And it backs up those protections with important new disclosures to let consumers know before they owe."
The cards, such as those issued by industry pioneer Green Dot Corp. of Pasadena, can be loaded with money by a consumer or a third-party, such as an employer using direct deposit. Many states now distribute tax refunds, unemployment checks and other government payments on prepaid cards.
The amount of money on those cards increased dramatically to $65 billion in 2012 from just $1 billion in 2003, the CFPB said. By 2018, prepaid cards are expected to hold $112 billion.
The growing reliance by consumers on the cards was highlighted by an October 2015 outage that prevented thousands of RushCard customers from accessing their accounts. The Cincinnati company later announced it was establishing a compensation fund of at least $19 million for affected customers.
Green Dot experienced an outage this year, which drew the attention of Congress.
The new rules don't protect consumers affected by such outages, and the consumer bureau didn't outlaw optional overdraft protection on some cards that trigger fees.
Still, they provide the first broad federal consumer protections for a fast-growing segment of the financial services industry as even low-income Americans take to cards and smartphone apps.
Steve Streit, chief executive of Green Dot, which issues Wal-Mart-branded prepaid cards, said he supported the agency's mission to bring order to the industry when the draft rules were proposed in 2014, but the company declined to comment on the final regulations.
"A football game without rules and referees isn't a sport; it's a brawl," he had said at a CFPB hearing on the issue. "Like sports, to be successful, industry also needs rules and referees to ensure fairness, integrity and safety for all participants."
Lauren Saunders, associate director of the National Consumer Law Center, said her group was pleased by the final rules because they would eliminate fraud, make costs more transparent and curtail, though not eliminate, overdraft fees.
"The rules bring prepaid cards out of the shadows, with protections that in many ways are stronger than those for traditional bank accounts," she said.
But there was griping from a trade group representing card issuers, payment networks and others in the industry that they had gone too far.
Brad Fauss, president of the Network Branded Prepaid Card Assn., said it was clear the CFPB "dismissed many of our serious concerns and moved forward with a rule that will harm the very consumers it aims to protect."
Among his concerns was an "overly broad" definition of prepaid accounts and an effective date of Oct. 1, 2017, that will not give issuers enough time to implement the new rules, he said.
"Instead of fostering financial innovation and inclusion, the CFPB's rule will ultimately limit access to an essential mainstream consumer product that helps millions of Americans participate in the digital economy, affordably manage funds, and safely hold money," Fauss said.
The rules specifically require financial institutions that offer prepaid accounts to provide consumers with free and easy access to their account balances, transaction history and a list of any fees charged. If the issuer doesn't send out periodic statements, the information must be available by phone, online or in writing upon request.
Consumers Union had complained in 2014 that it could be "maddeningly difficult" to figure out the fees on prepaid cards. A report in April by the advocacy group found that competition has helped improve prepaid card offerings but said some cards still carry large and unexpected fees.
Consumers also get protections against fraud under the new rules. A consumer who promptly notifies the issuer about unauthorized transactions will be responsible for only $50 worth of charges, mirroring existing protections for users of debit cards linked to checking accounts.
The CFPB also is setting an industrywide standard on disclosures to help consumers understand fees upfront and allow them to easily comparison shop.
Some issuers allow consumers to spend more money than they have on their cards, and the CFPB rules will extend credit card-type protections to those users.
Companies offering such cards will have to make sure the consumer has the ability to repay before offering credit. Issuers also will have to give customers regular statements detailing fees, interest rates and other information and must offer at least 21 days to repay the credit before charging "reasonable and proportional" late fees.
Consumers also must be asked before money loaded into the card, such as from a paycheck, can be used to repay a credit bill. And issuers cannot offer credit until 30 days after a prepaid account has been opened.