Earlier this week, the Consumer Financial Protection Bureau
(CFBC) pleased all the prepaid card users by announcing its plans
to standardize the fast-growing reloadable prepaid card market and
at the same time protect their interest. The CFBC will accept
feedbacks on all the issues related to prepaid cards till July 22
and would release the final proposal by next year.
The CFBC is seeking inputs regarding the safety of the
customers' funds. It is also aiming for clear terms related to fees
and other charges that are levied by prepaid card providers.
Following the imposition of the debit interchange fee (proposed by
the Durbin Amendment), the U.S. banks and financial institutions
have been trying to figure out different ways to recoup revenue
losses. Hence, there has been surge in the issuance of prepaid
cards in order to mitigate revenue losses.
The major prepaid card issuers include
Green Dot Corporation
Netspend Holdings Inc.
). However, they are now facing increased competition from big
financial institutions -
JPMorgan Chase & Co.
American Express Company
Capital One Financial Corp.
Regions Financial Corp.
Wells Fargo & Company
) - who are trying to cash-in this lucrative (but still nascent)
reloadable prepaid card market.
What are Reloadable
Prepaid cards are almost similar to debit cards. The customers
can refill these with their own money according to their needs.
However, there is a vital difference between the two. Unlike debit
cards, prepaid cards are not necessarily linked to any bank
The target customers for prepaid cards include those who have
poor or limited credit and those who do not qualify for normal
checking or savings accounts. Additionally, as the customers cannot
issue checks and overdraw from their prepaid cards, the banks
benefit from lower processing costs.
Other features include cash withdrawal from ATM, options to
receive deposits and online access to account information.
Additionally, prepaid cards can also be used for online shopping
and other usual spending. This kind of a budgetary product will
attract consumers who have become more cautious about spending
after the recent recession and credit market crisis.
Why Regularize Prepaid Card Market?
Last year, the total amount loaded on to the prepaid cards came
at $57 billion. According to Mercator Advisory Group, this amount
is expected to grow at a rate of 42% per year in the next three
Currently, prepaid card users do not have similar protection
that is available for credit and debit card users. Therefore, the
CFBC wants to regularize various fees charged and other disclosures
related to the prepaid cards.
Key Areas of Focus
The CFBC would be evaluating various concerns related to several
disclosures and protection of the prepaid card users. There is a
lack of industry-wide standards on numerous fees charged
(activation fee, fees charged when money is loaded, checking
balance at ATMs and speaking to customer service) along with
protections (FDIC insurance) provided while using prepaid
Many of the disclosures related to these are revealed to the
consumers after they purchase these prepaid cards. Hence, they fail
to make knowledgeable decisions while buying a prepaid card.
Further, there are no clear standards related to the features
offered by prepaid card issuers. Though, prepaid cards generally do
not have any credit features, many issuers offer overdrawing from
their prepaid cards, small loans and savings account. Also, some of
these cards provide an opportunity to consumers to improve their
credit history. The CFBC will be evaluating all these features as
well as related costs, benefits and consumer protection issues.
Another major concern that needs to be taken care of is prepaid
card users' liability when there is unauthorized usage of their
cards. Though there are regulations related to these for credit and
debit card users, similar protection is not always provided to the
prepaid card users. While many prepaid card issuers extend this
offer, there is no standard across the industry.
This initiative of CFBC will provide the much needed
transparency to matters related to fees and features along with
protection of prepaid card users. With such regularization, the
prepaid card users would be able to make well-informed decision
while purchasing a prepaid card.
Likewise, the prepaid card industry would also benefit from the
new regulations. There would be a level playing field for all the
prepaid card issuers. This could further lead to increased
competition among the issuers, which in turn would be beneficial
for the users in the matters of fees and disclosures.
AMER EXPRESS CO (AXP): Free Stock Analysis
CAPITAL ONE FIN (COF): Free Stock Analysis
GREEN DOT CP-A (GDOT): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
NETSPEND HLDGS (NTSP): Free Stock Analysis
REGIONS FINL CP (RF): Free Stock Analysis
US BANCORP (USB): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
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