Prepaid cards, an increasingly popular form of payment, will be subject to new federal regulation starting next year, thanks to a rule to be finalized by the Consumer Financial Protection Bureau Wednesday.
Companies that issue prepaid cards, online wallets and other similar products will have to provide new consumer protections, including loss limits for customers who lose their cards or have them stolen.
Card issuers also will be on the hook to investigate and resolve payment errors and to provide disclosures to customers about the terms of the cards. In case the cards are used for credit, they will have to offer the same protections applicable to credit cards.
And customers whose cards stop working will have protections similar to those required of credit cards, a provision made more important given recent high-profile failures of cards.
Last fall, for example, thousands of holders of Rushcards, the card founded by the hip-hop producer Russell Simmons, had to go almost two weeks without being able to spend their money using the cards. The episode, which led the company to compensate customers $19 million to settle lawsuits, led to outrage on Capitol Hill and calls for stronger oversight of prepaid cards.
In May, users of Walmart prepaid cards reported problems using their cards for purchases or withdrawing funds from ATMs, again leading to calls from lawmakers for stricter regulation. The Walmart card has more than 4.5 million active cards outstanding.
Speaking to reporters Tuesday, a bureau official explained that customers who suffer similar outages would have greater recourse under the rule, the way that debit card users do. She warned, however, that “no amount of rulemaking can create a force field around provider systems” and that the possibility of card failures could not be regulated out of existence.
Card issuers preemptively objected to the final rule Tuesday, even though the bureau had scheduled a midnight release of the rule text. Brad Fauss, head of the Network Branded Prepaid Card Association that represents prepaid card companies, said that the rule would crimp access rather than foster innovation.
The bureau “has dismissed many of our serious concerns and moved forward with a rule that will harm the very consumers it aims to protect,” said Fauss.
Use of prepaid cards has soared in recent years and is becoming a key alternative to traditional checking accounts. The amount of money put on reloadable prepaid cards is expected to soar to $112 billion by 2018, according to the bureau, up from less than $1 billion in 2003, placing such cards among the fastest-growing financial products.
Roughly 23 million people use prepaid cards, according to the Pew Charitable Trusts. They tend to be lower-income families and disproportionately “unbanked” — that is, lacking a traditional bank account, data from the Federal Deposit Insurance Corporation show.
Prepaid cards are one of several means that unbanked people use to make payments and manage their finances. People who use prepaid cards are likely to also use payday loans or pawnshops. The bureau this year proposed sweeping new rules on payday loans meant to prevent borrowers from falling into a debt trap, regulations that the industry has warned could effectively end payday lending.
All of those options are alternatives to bank accounts for people who can’t afford fees or wouldn’t be able to keep the minimum balances required by banks, which are highly regulated by several agencies. Many people use prepaid cards to avoid costly bank account overdraft fees. The rule finalized Tuesday would prevent overdraft fees from being charged on prepaid cards.
Today, most prepaid cards are issued by banks that are FDIC-insured, and most issuers voluntarily offer liability limits to their customers, but many users aren’t aware that those protections are available for them to use, according to the Pew Charitable Trusts.
The bureau’s rule was proposed in 2014 and is scheduled to go into effect in October 2017.
