WASHINGTON–Consumer advocates on March 14 called for tighter regulation of the rapidly growing market for prepaid cards, arguing during a Senate hearing that too often the cards come with hard-to-understand fees that hurt their predominantly poor users.
Still, there appears to be little appetite in Congress for new legislation, given that the Consumer Financial Protection Bureau has authority over the prepaid market.
The hearing came one day after Green Dot Corp. and two other prepaid companies announced plans to test a new fee disclosure box aimed at educating their customers (see story).
Among those testifying was Jennifer Tescher, president of the Center for Financial Services Innovation, a nonprofit group partially funded by financial firms that developed the fee disclosure box. She argued that regulators should require prepaid companies to provide standardized disclosures, similar to the model that her group designed.
"There tend to be a range of different kinds of fees across card products," Tescher said in written testimony to the Senate consumer protection subcommittee, "and exactly how and where they are disclosed varies widely, making it difficult for consumers to make comparisons before they make a purchase decision."
Also testifying was Lauren Saunders, an attorney with the National Consumer Law Center, who said the industry generally is moving in the right direction. But she also voiced several concerns.
Saunders said that penalty fees should be avoided wherever possible. She also argued that customers should be able to monitor their accounts without incurring fees for doing so, and that overdraft fees and credit features should be eliminated from the prepaid card market.
"The very name 'prepaid card' should mean what it says," Saunders stated in written testimony. "Banning overdraft fees and other embedded credit features on prepaid cards would prevent deceptive practices and confusion and make the cards a safe, genuine alternative to bank accounts."
Saunders also voiced concern about how some states are using prepaid cards to distribute unemployment benefits. She said federal law requires states to give recipients the choice of receiving the funds in a bank account via direct deposit, but six states–California, Indiana, Kansas, Maryland, Nevada and Wyoming–are failing to do so.
Testifying from the industry was Daniel Henry, chief executive officer of NetSpend Holdings Inc., which partners with banks to provide prepaid cards. He argued that there is a misperception that the prepaid industry is unregulated or underregulated.
Henry also indicated that he could support increased disclosure of fees but drew a line over rules that would restrict fees on prepaid cards.
"We are all committed to developing more effective ways to communicate with our customers about the fees, terms and conditions of our products," Henry stated in written testimony. "But limitations on the products, such as restrictions on the types of fees that can be charged, will only harm consumers."
Henry took issue with a provision in a bill introduced in December by Sen. Robert Menendez, a New Jersey Democrat, that would prohibit customers from being charged a transaction fee for using their cards to make purchases.
"At NetSpend, we give our customers the choice of paying a monthly fee, or paying on a per-transaction basis," he said. "And the data show that the customers who opt to pay as they go do so because it is the right plan for their usage."
Menendez's bill would also prohibit annual fees, overdraft fees, fees for declined transactions, and fees for inquiries to customer service, among others (see story). Among the charges it would permit are fees for replacement of the card, fees for bill payment, and fees for out-of-network ATM withdrawals.
The hearing was convened by Democratic Sen. Sherrod Brown of Ohio, who said it is important consumers understand what they are using.
"Like many other financial products, when terms are clearly disclosed and consumers have complete information about the product, they can use them properly," Brown said. "But it is important that consumers understand all of the fees associated with these cards."
Brown asked the three consumer advocates on the panel whether they believe that Congress needs to take action on prepaid cards, given the Consumer Financial Protection Bureau's existing role. All three stated that the consumer bureau has all or most of the authority needed to address problems in the industry.
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