New Rules for Prepaid Debit Cards

by Ben Protess and Jessica Silver-Greenberg

The nation’s consumer financial watchdog is preparing restrictions on prepaid debit cards, a largely unregulated product that is flourishing even amid concerns about high fees and poor disclosures.

On Wednesday, the Consumer Financial Protection Bureau is expected to introduce a preliminary rule for prepaid products — the first of its kind. The bureau, which is expected to complete an overhaul in the next year, will also hold a hearing on Wednesday in Durham, N.C., that will feature testimony from consumer advocates and some of the card industry’s biggest players.

Until now, prepaid cards have escaped the regulations passed after the financial crisis. As new rules have targeted credit cards and traditional debit cards, a number of banks barreled into the prepaid market.

While the consumer bureau’s new effort would not rein in most fees that come with the cards, like a $5 monthly maintenance fee, it would require companies to reimburse consumers for unauthorized charges.

Card providers argue that they offer a competitive price and help consumers control their spending. But some federal regulators and consumer advocates worry that companies are steering low-income consumers into a relatively expensive product rather than plain vanilla checking accounts.

“The people who use prepaid cards are, in many instances, the most vulnerable among us,” Richard Cordray, the consumer bureau’s director, said in a statement, adding that “right now prepaid cards have far fewer regulatory protections” than traditional banking products.

David Newville, policy manager with the Center for Financial Services Innovation, said the proposed regulations would provide much needed transparency.

They are “what we would like to see,” he said.

The new oversight would coincide with a boom in the prepaid business. In 2009, borrowers had roughly $29 billion worth of prepaid cards, according to the Mercator Advisory Group, which provides research for the payments industry. By 2013, the volume of money on prepaid cards is expected to swell to $90 billion.

As big banks clamor for customers, they are muscling their way into the market, which until a few years ago was largely the terrain of less traditional financial firms like Green Dot and NetSpend. They also would be subject to the new rule.

In March, Wells Fargo introduced a reloadable prepaid card. And, Regions Financial, based in Birmingham, Ala., unveiled a prepaid card aimed at borrowers who typically do not have a traditional bank account.

JPMorgan announced earlier this month that it would start offering prepaid cards. Branded as “Liquid,” the card carries a $4.95 monthly maintenance fee but does not charge customers to add money.

The banks were drawn, in part, because prepaid cards were largely untouched by the Dodd-Frank regulatory overhaul law and other recent crackdowns that have siphoned billions of dollars in income from debit and credit card fees.

The law exempted prepaid cards from the so-called Durbin Amendment, allowing banks to impose high fees on merchants when consumers make a purchase with a prepaid card.

Advocacy groups have questioned whether card issuers clearly explain to cardholders the fees that come with the product, including charges to activate the card, load money on it, check a balance at cash machines and speak to customer service.

Some consumer advocates say the fees erode the money loaded onto the cards. Wells Fargo, for example, charges $3 for customers to withdraw money using a bank teller and $5 to replace a lost card.

A study by Pew, a nonprofit research group, also indicated that some customers were unaware their prepaid cards are not necessarily protected by the Federal Deposit Insurance Corporation. The bureau’s new proposal would not address that issue.

But under the bureau’s so-called advanced notice of proposed rulemaking, the agency is seeking to apply a longstanding federal rule for debit and gift cards to prepaid products. The rule, known as Regulation E, requires companies to reimburse customers for unauthorized transactions that pop up when a prepaid card is lost or stolen.

Consumer advocates including Adam Rust of Reinvestment Partners cheered the bureau’s plan.

“This is why we have a C.F.P.B.,” said Mr. Rust, who will join Visa and NetSpend executives among panelists at Wednesday’s hearing. “We don’t have basic protections in place for these cards.”

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