To be clear, the CFPB won’t actually “kill” all prepaid in new rules that are expected out shortly.
But if expectations are right and the final rule looks a lot like the NPRM, the CFPB is cunningly rendering some prepaid verticals financially unviable as business options, even as it “allows” them to exist.
But, does that mean that the incredibly valuable products that years of innovation in prepaid have enabled will be dead, too?
I don’t think it has to mean that. Verticals we’ve grown accustomed to thinking of as prepaid can live well and comfortably on a DDA/debit card platform—particularly GPR and payroll, and likely all or most reloadable cards. So, why shouldn’t financial institution issuers “move” prepaid verticals negatively affected by the final rule to a DDA/debit platform, managing those products as checkless checking accounts and providing traditional debit cards as the transactional form factor?
Financial institutions offering checkless checking is trending, and checkless checking accounts—as part of the FDIC’s 2011 Model Safe Accounts Pilot—appeared to perform well among the underserved consumer participants. And, several payments attorneys with whom I’ve spoken informally have indicated they don’t see significant impediments to a platform change. So, moving GPR, payroll and other recurring payment programs from a prepaid platform to a DDA/debit platform appears reasonable and responsible. In addition to reducing the potential negative effects of the CFPB’s final rule, it also could relieve financial institutions from the need to categorize nearly all prepaid funds as brokered deposits and lessen the effect of including prepaid cards under the definition of monetary instruments, as FinCEN appears to be contemplating once again.
Is moving platforms an end-run around the final rule? I don’t see how restructuring around an accepted platform can be construed as an end run. In fact, I’m of the mind that regulators have been deliberate in triangulating prepaid, and encouraging financial institutions to move the most significant prepaid products to a DDA/debit platform has been their goal all along. Maybe that’s giving regulators credit for too much forethought, but if I were a regulator, I’d be happy to claim victory in this way.
I’ve probably oversimplified what’s involved in moving prepaid verticals to a DDA/debit platform, but I’m looking forward to colleagues identifying the challenges and solutions.
I know I have questions about the effect of changing platforms—chief among them:
What would be the role for prepaid program managers and non-traditional distributors? An advantage of the prepaid platform is its distribution model, which makes prepaid cards available outside of traditional financial institution branches—so it’s easier and more comfortable for all consumers—but especially those who are underserved—to access financially empowering products. If an issuer converts its GPR cards, for example, to a DDA/debit platform, will program managers and distributors continue to be able to place those cards in non-branch locations?
How would financial institutions ensure their prepaid-replacement products were available to all consumers? Another significant benefit of the prepaid platform is the availability of cards to consumers who don’t qualify for checking accounts. How would financial institutions alter their customer requirements, especially for consumers whose prior financial behaviors have placed them on negative files for account opening, to ensure their prepaid-replacement products are available to all who satisfy appropriate customer identity requirements?
How would non-branch deposits, particularly cash, be handled? The prepaid experience has proven the need to bring all types of banking convenience to locations that consumers visit regularly and where they’re comfortable—which doesn’t necessarily include financial institution branches.
What effect would the interchange differential on issuers? Is the interchange differential between prepaid and debit transactions for financial institutions $10 billion and under a big enough reason to keep all prepaid verticals on a prepaid platform?
I’ll be optimistic and suggest that these and others issues that will surface are easier to address than dealing with the expected requirements and unintended consequences of the final rule. I’ll also be optimistic that the CFPB recognizes that prepaid has created numerous learnings about the delivery of financial services to consumers and supports incorporating these learnings into the DDA/debit platform mainstream.
So, has prepaid been a waste of time?
Absolutely not! For one, prepaid products will live on, because for some products prepaid is the best and most workable platform. And, depending on how a number of issues shake out, including those identified above, it may be necessary to continue certain verticals on the prepaid platform, although, likely at a higher cost to consumers. Second, for nearly a decade and a half, the most significant innovation in payments has been generated by prepaid, and that innovation has led to a renewed interest in and expansion of payments. And, third, prepaid has financially empowered millions of consumers—helping them budget and manage their money; offering security; and providing the convenience and dignity of owning a branded payments card. Prepaid isn’t a failed experiment; it’s the transition that facilitated payments maturation during the first part of this century.
To answer my own question, does checkless checking replace prepaid after the final rule goes into effect? Yes, for some prepaid verticals it can and it should. If changing platforms is what enables financial services to maintain the valuable products prepaid created and also enables regulators to be more comfortable with those products, it’s a win for everyone.
Marilyn Bochicchio is founder of Hidden Brain.