Viewpoint: A Bright Spot for Prepaid Card Issuers
On Feb. 3, 2016, the CFPB announced that it had sent a letter to the nation’s top 25 retail banks urging them to “make it a point to provide consumers with a viable choice of a lower-risk account that promises no authorized overdrafts.” The letter explained that this was not “any sort of regulatory requirement” but was “simply a suggestion.”
I don’t doubt that some bankers are irritated that the CFPB wants to tell them what products to offer. But one can see this as good news for the prepaid card industry. That might be hard to swallow given some of the CFPB’s prior prepaid activity, like its proposed Regulation Z and Regulation E amendments that seem designed to discourage the offering of prepaid accounts. But hear me out.
The CFPB’s letter to banks and credit unions suggests that either a checking account or a reloadable prepaid account can be an option for the lower-risk account. In commenting on the letter at a field hearing, CFPB Director Richard Cordray noted that these safer products “do not even have to be checking accounts,” and that many general purpose reloadable cards “are specifically designed to help consumers manage their spending while limiting their transaction costs and risks.” He acknowledged that prepaid cards “may not be the first choice for every consumer” but added that “everyone deserves the opportunity to choose what is best for him or her.”
So not only is the CFPB recognizing the value of consumer choice, which is encouraging, but officials acknowledge that a prepaid account might be the best choice for some consumers. It appears that the agency finally has grasped the benefits of prepaid accounts.
The CFPB’s announcement explains that the agency wants to see accounts that are designed not to authorize overdrafts and that do not charge overdraft fees. This gives prepaid cards a clear advantage over checking accounts. While a bank can refuse to honor a check that is drawn against insufficient funds and can waive any overdraft fee, the consumer still can be hit with a fee by the payee of a check that’s returned unpaid.
In contrast, most prepaid card transactions can be blocked if the consumer does not have sufficient funds and without resulting in a negative balance in the consumer’s account or triggering returned-payment fees by merchants. It’s true that “force-pay” transactions cannot be blocked—for instance, when a merchant does not obtain authorization for the charge in advance—but those transactions are comparatively rare. Force-pay transactions can result in a negative account balance, but the merchant would have no reason to impose a returned-payment fee and banks can agree not to charge overdraft fees in such cases.
So I believe that the prepaid industry has been given an opportunity. I can imagine that some banks that received the CFPB’s letter are closely watching their competitors, wary of the first bank to follow the CFPB’s “urging,” a move that could force all other banks to follow suit. I’d suggest that our energy is better spent in treating the CFPB’s action as an “invitation” to expand reloadable prepaid card offerings, with appropriate safeguards, of course.
John ReVeal is the financial institutions group’s lead regulatory and compliance lawyer in Bryan Cave’s Washington, D.C., office. He focuses on financial institution regulation and transactions, advising banks and savings institutions on organizational and transactional matters, bank and thrift powers, federal preemption, exportation of rates and charges, anti-money laundering and anti-terrorism financing regulations and financial institution licensing matters. He may be reached at email@example.com.
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