Will New CFPB Regulations Mean Fewer Prepaid Cards?

Prepaid Card Regulations ComYes, according to the Network Branded Prepaid Card Association (NBPCA), a trade association for the prepaid card industry. In its comment letter to the Consumer Financial Protection Bureau (CFPB) this week concerning proposed prepaid card disclosure requirements, the NBPCA warned that “[i]f left unchanged, the costs of compliance with just this portion of the Proposed Rule would likely cause most providers to exit the prepaid marketplace.” The CFPB issued the proposed rules governing prepaid card disclosures in November of last year.

The CFPB rules would require prepaid card issuers to provide two standardized disclosures–a short form and a long form. The short form would require prepaid card issuers to summarize account fees by disclosing key fees using a model form. The long form would require disclosure of all fees charged by the prepaid card. The rules would require further Truth-In-Lending disclosures under Regulation Z, currently applicable to credit cards and other loans, if the prepaid card extends credit.

The NBPCA’s Case

While agreeing in principal with some of the basic premises behind the proposed rule, such as a standard short-form fee disclosure, the NBPCA contends that the rule goes too far in imposing regulatory burdens on the industry. Burdens that could come with the cost of fewer industry participants, with little benefit to consumers.

Record Keeping Burdens

The NBPCA agrees that a summary disclosure of material fees, like the proposed short form, is a good thing. However, it takes issue with the non-standard portions of the disclosure. The model disclosure form would require prepaid cards to disclose seven common fees, such as the monthly fee, purchase fees, and ATM fees. That’s fine, says the NBPCA. But the mandated form would also require the disclosure of three additional fees, which the CFPB refers to as “incidence-based fees.” The incidence-based fees would be the fees most commonly charged by the prepaid card issuer that are not included in the seven standard fees. These disclosures are required to be updated annually.

This, according to the NBPCA is one of the more onerous requirements of the rule. By necessity, the fees that comprise the incidence-based fees will differ from card to card. But these fees may also vary based on how different consumers use the same prepaid card. These differences will create a level of record keeping requirements and marketing changes that will, according to the NBPCA, amount to a “massive amount of new procedures, controls, systems updates, and packaging/design changes.” Changes that will be costly enough to drive some prepaid cards out of the market.

Long-Form Disclosure Burdensome to Retailers, Confusing to Consumers

The proposed rule would require prepaid card issuers to provide the long-form disclosure when consumers purchase the card over the internet and a link and phone number on retail packaging to obtain the long-form disclosure when consumers purchase the card in a retail store. The rule, however, would require retailers to provide a copy of the long-form disclosure when they carry cards from only one issuer. The NBPCA points out that many retailers are small businesses that may not know that the prepaid cards offered at their stores are from one issuer, leading to some unintended consequences. In fact, two of the largest prepaid card issuers, MetaBank and Bancorp, issue cards through various plan sponsors that brand the card and offer different terms. It’s not obvious that these cards are issued through the same bank.

And it’s not clear whether the long-form disclosure will be helpful to, or even used by, consumers. In this regard, the CFPB itself found that

consumers would necessarily benefit from receiving only this long form disclosure before acquiring a prepaid account. In the Bureau’s testing, for example, many participants reported feeling overwhelmed by the amount of information included on a prototype long form and they struggled to compare two long form disclosures, even those that listed identical fee types. The Bureau believes that the potential size and complexity of the long form might overwhelm and lead consumers to disregard the disclosure and also not use it to comparison shop across products or even to evaluate a single product.

Prepaid Cards Shouldn’t Be Treated Like Credit Cards

Under the rule, Regulation Z would apply to prepaid cards that offer credit. The NBPCA points out that this has the potential effect of covering all prepaid cards when credit is not intended by either the issuer or the consumer. The NBPCA provides several examples of when a prepaid card, whose use is typically limited to the available balance of the card, may go negative. Such instances might occur with preauthorized transactions at the gas pump or in restaurants, where the exact purchase amount is not actually known at the time the card is swiped. Under the rule, the negative balance would be treated as an extension of credit, whether or not fees are charged in connection with the negative balance.

Further, there are several cards that offer a small (usually $10) “purchase cushion” that essentially acts like a small overdraft feature that is sometimes offered by prepaid cards as a convenience. These offerings are frequently without separate fees or interest. The NBPCA notes, however, that the prepaid card’s ordinary fees that are not triggered by the overdraft, such as the monthly fee, would put the card within the Regulation Z requirements of the rule, substantially adding to the compliance burden when this is not the type of credit intended to be covered.

Will Prepaid Cards Exit?

The NBPCA warns that prepaid card issuers will exit the industry if the new regulations go into effect as proposed. It’s certainly not uncommon for a trade organization to oppose new regulations on its members. The NBPCA, however, does support the proposed short-form that would standardize disclosures of core fees that the consumer is most likely to incur. The question is whether the proposed rule goes too far and, in so doing, will make the prepaid card business unprofitable for issuers and ultimately leave consumers with fewer choices.

There is certainly some evidence that the risk is real. While many banks and large retailers, like JPMorgan Chase, American Express, and Walmart, have jumped into the prepaid card market over the past few years, there have been notable exits as well. On the commercial side, which includes prepaid cards issued for payroll and government benefits, JPMorgan Chase announced its intention to exit the industry in early 2014, with some citing “razor thin margins” and increased government scrutiny as the impetus of the decision. Citigroup exited the year prior. On the consumer side, the examples of prepaid cards throwing in the towel are many, with some prepaid cards exiting the industry as quickly as they started.

The CFPB noted that “[i]n recent years, the [prepaid card industry] has grown increasingly competitive, which has resulted in a decrease in prices.” That has certainly been good for consumers that use prepaid cards, but it has also left issuers with smaller margins that may not be able to absorb the costs of new regulations. For some, that could mean bowing out of this space. For others, it could mean passing the new costs on to consumers. Ultimately, consumers may gain a clearer understanding of the fees charged by the remaining prepaid cards under the new regulations, but those fees may just be higher than they were before.