How will the new prepaid rules affect your company?
From card makers to processors, any company touching the open-loop prepaid industry will be affected by the recent final ruling by the Consumer Financial Protection Bureau (CFPB), which will take effect on Oct. 1, 2017.
In this first article, I lay out some facts and consensus of opinions about the effects of the new rules. In Part II, I’ll discuss consequences of prepaid rules changes on leading prepaid companies, including FIS.
What Drove Prepaid Rules Changes?
The rapid growth of the prepaid market – estimated to reach $112 billion in total load volume by 2018 – combined with the dependence of unbanked consumers on prepaid for financial access drew the CFPB’s attention. As the industry matured, features added to prepaid shifted the positioning closer to traditional bank accounts and, with limited regulation, fees could top those typically charged for a simple deposit account. In the view of the CFPB, the old rules for prepaid could not stand.
1,698 Pages Condensed
The new rule book is ponderous. Here are the top-line facts:
- Treating advances accessed through a prepaid account as “open-end credit” covered under Regulation Z. This includes both a credit feature for which only participation fees are charged and an overdraft feature for which overdraft fees are charged. As a result, various CARD Act credit card requirements will be applied to prepaid including:
- Requiring companies to evaluate consumers’ abilities to repay debts before they offer credit.
- Providing monthly billing statements mailed or delivered electronically at least 21 days before the due date.
- Limiting first-year fees and late fees.
- Providing advanced notice of interest increases.
- After a new account is registered, there will be a mandatory 30-day waiting period before a financial institution can solicit a consumer for a linked overdraft of credit feature (or allow access to the feature).
- Issuers will not be allowed to automatically apply reload funds to someone’s credit balance. Consumers must opt-in to allow creditors to apply prepaid funds to debts on advances, and creditors cannot deduct funds more than once a month.
- Consumers must be given short- and long-form disclosures of fees and other information. Prepaid account agreements must be posted on an issuer’s website as well as the CFPB’s website. Issuers also will need to make available periodic Regulation E statements that include information about fees, deposits and debits, and cover at least an 18-month account history.
- Regulation E liability limits (e.g., limiting the user’s liability to $50 in cases of unauthorized use) and error resolution requirements (including provisional credit requirements) must be applied to all prepaid accounts registered with an issuer.
Broad Definition of Prepaid
One of the complaints heard often among those in the prepaid industry is that the definition of prepaid is too broad because it includes one-time, non-reloadable prepaid instruments (i.e., prepaid cards or virtual prepaid).
Under the new rules, a prepaid account is defined as a card, code or other device that is capable of being loaded with funds. Other accounts that will not be considered prepaid, like a deposit account, are covered under Regulation E and redeemable upon presentation at multiple, unaffiliated merchants or useable at either ATMs or for person-to-person payments. The rules will affect a long laundry list including mobile and other electronic products that can store funds: traditional prepaid cards, reloadable prepaid cards, mobile wallets, person-to-person payments, tax refund cards, payroll cards, cards for student aid and some government benefit cards. It will not affect gift cards labeled as such, merchant-specific store cards or loyalty/promotional rewards cards.
Regulations Add Costs and Unintended Consequences
Prepaid is already a low-margin business. These new regulations may make that even harder, and issuers will need to adjust their models in order to make money. What I believe will happen is that the big players – even ones taking an immediate hit to revenues – will adjust their models and survive, while some of the small ones will either merge or drop out of the prepaid market.
Too Tight Timeline
The CFPB has put forth an ambitious timeline and the general industry consensus is that it’s unrealistic. As in any type of regulatory change, the rules are put forth, but many are open to interpretation, and not everyone will interpret them the same way. The process of digesting 1,698 pages of rules, interpreting them in a way that satisfies the requirements of the CFPB, developing a plan with input from multiple voices and then executing the plan equals more than a year’s worth of work.