Prepaid Regulation Could Have Adverse Effects, Says Study (Jan. 15, 2013)
Jan. 15, 2013
Competition in the network branded prepaid card market has led to lower costs and better functionality for card users, says a new working paper from the Mercatus Center at George Mason University. The well-functioning market, combined with a lack of evidence that consumers are making errors when choosing a prepaid card, means any prescriptive regulation of the terms and substance of prepaid cards is likely to have unintended consequences that would outweigh benefits, according to the paper’s author, Todd Zywicki.
As prepaid cards have become more mainstream over the past several years, regulatory scrutiny has increased, notes Zywicki, a law professor and senior scholar at the Mercatus Center. “Yet, there is no evidence that prepaid cards are excessively expensive compared to relevant alternatives or that prepaid card customers systematically fail to understand the fees and other costs of prepaid cards or the costs of relevant alternatives,” Zywicki writes. The minimal barriers to entry, meanwhile, make the prepaid market a “robustly competitive one,” with smaller providers competing alongside the financial giants who have entered the market in recent years, including American Express, JP Morgan Chase and U.S. Bancorp, among others.
Zywicki argues the largest barrier to competition in the prepaid market is regulation itself—specifically, the Durbin Amendment to the Dodd Frank Act, which restricts interchange fees on prepaid cards offered by larger financial institutions, thus limiting the long-term profitability of offering prepaid cards for such firms. “Thus, at the same time that the Durbin Amendment has swelled the ranks of the underbanked, it could also stifle the evolution of prepaid cards into low-cost substitutes for bank accounts for unbanked and underbanked consumers,” warns Zywicki, who calls for the repeal of the amendment—a move he says will enable interchange fees to be set by market forces and thus help prepaid cards remain profitable for large providers.
The CFPB is expected to issue rules related to network branded prepaid cards sometime this year or early next, following its ANPR last May.