Prepaid cardholders are certain to enjoy more federal protection soon. But it remains open to debate how much those protections should resemble those for conventional bank accounts.
It was inevitable that the Consumer Financial Protection Bureau would provide some protections for consumers who use general purpose reloadable prepaid cards, experts say. The products' fees have long made consumers wary, and the backlash against such fees caused at least one product, 2010's Kardashian Kard, to famously flare out within weeks of its introduction (see story).
Last week, the bureau announced its plans to apply Regulation E rules to prepaid card accounts (see story).
Regulation E, as established through the Electronic Funds Transfer Act in 1978, provides federal protection for consumers against potential mistakes in electronic funds transfers. It also protects against unauthorized purchases made on lost or stolen cards.
By planning to apply Regulation E to prepaid cards, the bureau is grasping the "low-hanging fruit" in the debate, Adam Rust, director of research for consumer advocate group Reinvestment Partners of Durham, N.C., tells PaymentsSource.
"No one is going to stand up and say they don't want consumer protections on purchases made with prepaid cards," Rust contends.
However, card issuers and consumers are more likely to disagree, or at least extend the debates, regarding fee disclosure or applying fees to various services associated with the cards, Rust says.
Currently, the bureau is seeking consumer feedback. It has not decided whether prepaid card accounts require the same protections as credit and debit cards linked to bank accounts.
Prepaid card accounts carry many fees that debit cards and bank accounts typically do not. For example, prepaid cards might have dormancy fees as well as fees for a paper statement. The bureau plans to consider placing limits on those fees.
There is also a lack of consistency among prepaid card providers — some issuers charge activation fees for prepaid cards and some do not. However, some waive monthly fees if a direct deposit is set up or the card is used a certain number of times a month. Some charge fees for PIN transactions but not signature transactions.
Consumer advocate groups have long called for bureau action, claiming fees for prepaid cards are not clearly disclosed to those who use them, making it difficult to determine which card provides the best value (see story).
One major problem in the prepaid card space is "junk fees," says Brian Riley, senior research director and analyst with Needham, Mass.-based TowerGroup.
"Frankly, I think this [protection] was long overdue, because consumers were really exposed with prepaid cards without Regulation E protection," Riley tells PaymentsSource.
A consumer could get a fee for a failed authorization on a purchase at the point-of-sale because his prepaid card was a few dollars short, Riley says. The consumer may then have to pay a fee to check the card's balance by phone, he adds.
"While a prepaid card product warrants some fees, it does not warrant a bunch of junk fees to survive," Riley says. "At the end of the day, these are consumer funds that need adequate protection, and the consumer needs protection from fees."
A panel of prepaid card experts at the recent Card Forum event in Orlando, Fla., touched on the topic of banks issuing prepaid cards and disclosing fees to consumers (see story).
While acknowledging the difficulty consumers may have in "comparison shopping" for prepaid cards, disclosures have improved, said John Barbella, senior vice president for The Bancorp Inc.
"The cowboys out there charging exorbitant fees can't do that any longer," he said.
Consumers are far wiser these days when making decisions about what products they want to invest in, said Hyung Choi, head of U.S. prepaid products for Visa Inc.
"The consumer will weed out those cards they consider too high-priced or not delivering what was expected," Choi said.
Most consumers want the services a prepaid card offers and want to make payments through a network, so they view prepaid cards as having real value for them — if the fees are reasonable and the disclosure is clear up-front, Rust says.
However, some consumers might frown on federal regulations that would essentially push them "back into a regular banking experience," says Maria Arminio, president of Avenue B Consulting Inc., a Redondo Beach, Calif.-based payments management consulting firm.
"The unbanked use prepaid cards to keep a level of anonymity associated with their purchases, and they don't want traditional bank accounts," Arminio tells PaymentsSource.