A popular alternative to checking accounts that doubles as a useful financial education tool for young consumers is about to face more regulatory oversight.
The federal Consumer Financial Protection Bureau in November proposed sweeping and long-overdue rule changes on prepaid cards, which are one of the fastest-growing financial products. The draft regulations, among other things, would bolster cardholder rights, strengthen fraud and theft provisions, and provide more disclosure of fees and other account information.
Barring late changes following a 90-day public comment period, regulators will issue a final ruling in 2015.
Prepaid cards come in many shapes and forms, often carry the logos of issuers such as Visa and MasterCard, and can be bought at retail stores, financial institutions and other outlets.
In essence, users “load” funds onto the plastic and then spend that money when using the card. Some cards allow users to add money, while other prepaid products allow you to take money out at an ATM. Even gift cards are classified as prepaid cards, although they operate under different sets of rules and are not covered by the consumer bureau’s regulatory proposals.
For many “unbanked” people who live outside the traditional financial system, prepaid cards take the place of a checking account. In addition, many parents have turned to prepaid cards as a teaching tool to help their children learn the ropes about spending money prudently. After all, you generally can spend only what’s on the card.
In response to the cards’ rising popularity, federal regulators set out two years ago to address some of the perils of using the plastic and to clear up some of the marketing confusion surrounding them.
For example, the cards have always carried a greater risk for fraud than with credit cards because funds are immediately removed from the electronic account once a transaction has been completed.
To partly fix this, the consumer organization ruled that liability should be capped at $50 on unauthorized transactions. That’s the same legal limit as credit cards, although many banks provide full protection on credit transactions.
In addition, the proposed regulations would require financial institutions to either mail monthly statements that show account balances, recent transactions and key fees, or make that information available online.
Other key proposals in the regulatory draft:
▪ More upfront information on monthly fees, ATM withdrawal costs, fees to reload cash on the card and other charges.
▪ More disclosures about overdraft protection that many card issuers offer to cover the cost of a transaction that exceeds the amount left on the card.
▪ A 30-day waiting period after a cardholder registers his prepaid product before the issuer can offer credit, such as overdraft protection or even a credit card.
WalletHub, a personal finance website, called the proposed reforms “altogether beneficial” to consumers. But in an analysis it prepared on the proposals, WalletHub said regulations still have a ways to go.
For example, WalletHub said, regulators did not go far enough in simplifying card fees. According to its analysis, prepaid products now carry an average of 11 different fees that can result in annual charges of about $400.
“Capping the number of different fees that a prepaid card can charge … would perhaps have made an even bigger positive impact on the market than overhauling disclosures,” its report said.
The Pew Charitable Trusts also called for more disclosures to “eliminate the guesswork” consumers face at the checkout counter in deciding which prepaid card to buy.
“Mandating full disclosures on card companies’ websites but not at the point of sale makes it hard for customers to comparison shop because all the fees would not be listed on the outside of the card packaging,” Pew said in a statement.
For a copy of the proposed rules and information on how to submit public comments, go to the Consumer Financial Protection Bureau website at http://www.consumerfinance.gov.
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