In another sign prepaid debit cards have finally arrived as a mainstream financial product, it looks like they'll be getting some heat from the Consumer Financial Protection Bureau.
The CFPB announced this week it may soon be setting some ground rules for the general purpose reloadable, or GPR, cards that many use as a substitute for traditional checking accounts. From the CFPB press release:
The Bureau's Advance Notice of Proposed Rulemaking seeks input on how to ensure that consumers' funds on prepaid cards are safe and that card terms and fees are transparent.
"The people who use prepaid cards are, in many instances, the most vulnerable among us," said CFPB Director Richard Cordray. "All consumers need, and deserve, products which are safe and whose costs and risks are clear upfront. Yet right now prepaid cards have far fewer regulatory protections than bank accounts or debit or credit cards. That's why we are launching a rulemaking to promote safety and transparency in this emerging market."
In our prepaid card survey this year, we found a bewildering array of fees and terms attached to GPR cards, a lot of uncertainty over whether the balances would be fully FDIC insured, and other issues.
Part of that is inherent in the ala carte nature of these cards; instead of paying for a bundle of financial services like you do with a checking account, you're often paying for each individual service or transaction separately. That can make it difficult to figure out the total amount you've paid for using a GPR card over any given period of time.
The other big factor is that this is a relatively young industry; reloadable prepaid debit cards didn't appear until the mid-90s, and the first GPRs hit American wallets around the late '90s/early 2000s or so. Industry standards haven't really been established yet, and so there are significant differences over how providers do things.
I'm not surprised the CFPB is making this move. At the CFPB town hall I attended in New York a few months ago, prepaid debit cards were among the most-discussed products, with many participants complaining of excessive fees and other issues.
In the official document touching off the rulemaking process, the CFPB cited three main reasons for its push to regulate GPR cards:
- The rapid growth of the industry: "The GPR card market is one of the fastest growing segments of the overall prepaid market. According to the Mercator Advisory Group, the total dollar value of funds loaded to GPR cards is expected to grow at an average annual rate of 42% from 2010 to 2014."
- Their increasing role as a substitute for traditional checking accounts: "Some consumers may view and use GPR cards as an alternative to traditional checking accounts. This possibility is reflected in the increase in the number of GPR cards that consumers are loading through direct deposit. The second largest GPR card program manager reported that nearly 42% of its cardholders had direct deposit as of December 31, 2011, as compared to about 14% as of December 31, 2007."
- The lack of existing regulation to protect consumers: "Unlike some other 'general-use prepaid cards' such as payroll cards, Regulation E generally does not apply to GPR cards. Many GPR card market participants offer contractual protections similar to those provided in Regulation E for payroll cards, though such provisions may vary, and are subject to unilateral change."
The CFPB also set up a prepaid card FAQ that may help GPR users decipher some of the jargon surrounding the cards. If you want to make your voice heard on the issue, the CFPB is taking comments online, but the Web page to do so won't be available until tomorrow. I'll update this post with it then.
What do you think? Do prepaid debit cards need to be more closely regulated? Is the CFPB doing the right thing?
Follow me on Twitter: @ClaesBell.
Update: Here's the link to comment on the CFPB's rule-making push on prepaid debit cards.