Prepaid debit cards have exploded in popularity, despite the absence of many of the consumer protections assigned to bank accounts and credit cards. Now, the federal government has finalized new rules designed to make fees more transparent and to better protect consumers in case of loss or theft.
The rules, announced Wednesday by the Consumer Financial Protection Bureau after years of discussion, are meant to protect users of general purpose reloadable debit cards, products you might find at a convenience store that act like a debit card, but aren't tied to a bank account.
They have become increasingly used for everything from distributing payroll to employees to handing out government benefits. They also are used as a substitute for a conventional bank account. The new rules also cover funds stored in mobile wallets.
"The rules bring prepaid cards out of the shadows, with protections that in many ways are stronger than those for traditional bank accounts," Lauren Saunders, associate director of the National Consumer Law Center, said in a statement. "Consumers will have protection from fraud, costs will be more transparent, and dangerous overdraft fees will be curtailed, but unfortunately not eliminated."
CARD SEARCH: Find a new rewards credit card today. Let Bankrate help.
The new protections, which go into effect in October 2017, require debit card issuers to:
- Limit consumers' financial loss in case of lost or stolen cards. Consumers will be liable for up to $50 of unauthorized charges if they report a lost or stolen card within 2 business days after discovering it missing. This is similar to the protection available on bank debit cards.
- Make clearer the fees associated with the card. Issuers will be required to disclose periodic fees, per purchase fees, ATM withdrawal and balance inquiry fees, cash reload fees, customer service fees and inactivity fees.
- Provide free access to account information. Consumers should be able to easily access account balances, transaction history and the fees they've been charged.
"These important new protections fill gaps in the law for consumers," CFPB Director Richard Cordray said in a conference call with reporters. "The rapidly growing ranks of prepaid users deserve a safe place to store their money and a practical way to carry out their financial transactions."
New overdraft protections
Consumer groups had fought for a provision that would eliminate overdraft fees on prepaid debit cards. The CFPB declined to restrict overlimit fees outright, but instead sought to make them more transparent.
The new regulations require issuers:
- Wait 30 days after a consumer registers a prepaid account before offering credit that would cover charges beyond the funds that are available on the card.
- Ensure consumers have the ability to repay the debt before offering credit.
- Limit total credit fees to 25% of the credit limit during the first year the account is open.
The NCLC says just 2% of prepaid cards carry optional overdraft protection. These cards are primarily associated with payday lenders or through employers.
Not everyone is on board
Meanwhile, the prepaid card industry, led by the Network Branded Prepaid Card Association, has fought the new rules, saying they are bound to eliminate or increase the cost of "popular card features."
"While we are still analyzing the lengthy final rule to determine its full impact, it is already clear that the CFPB has dismissed many of our serious concerns and moved forward with a rule that will harm the very consumers it aims to protect," Brad Fauss, the group's president and CEO said in a statement. "Instead of fostering financial innovation and inclusion, the CFPB’s rule will ultimately limit access to an essential mainstream consumer product that helps millions of Americans participate in the digital economy, affordably manage funds, and safely hold money."