If it seems like there have been a lot of stories about prepaid cards lately, that`s because there have been. Prepaid cards are some of the biggest things going in the financial industry today, whether people are signing up because of the celebrity appeal factor or because they are a member of the “underbanked” population, who have trouble getting a credit card or even a bank account.
The prepaid card market is estimated at $150 billion today and just keeps growing. Until now, they`ve been under the radar of the federal government and escaped regulation from the Credit CARD Act of 2009. Issuers of prepaid cards have been free to charge outrageous fees to users, and they`ve largely done so, attempting to make up for lost fees of credit and debit cards in post-CARD Act America.
Now the Consumer Financial Protection Bureau (CPFB) is stepping in to put regulations in place to protect consumers from predatory fees and policies that could result in huge chunks of money being drained from any deposit made to a prepaid card.
Prepaid Cards, Pro or Con?
On one hand, prepaid cards provide an essential service for those who make use of them – giving people access to plastic when they can`t get it any other way. How many times during a typical day might a person need a credit card? Whether making purchases online, paying a Muni-Meter for parking, or putting down a deposit on a rental car, it`s hard to get along without a credit card.
Of course, a prepaid card isn`t exactly a credit card, which is one of the great things about it. Since money is pre-loaded onto the card and there`s no way to accrue debt using a prepaid card, it`s not possible to get in over your head with one. They are the perfect solution for parents who want to give their teenagers an allowance and still have the ability to track and control their spending, or someone with bad credit history who can`t get a credit card and is trying to re-learn good financial habits.
There are a couple of downsides to prepaid cards, however. The first one, and the smaller concern, is that they don`t help a person`s credit history. So that consumer learning to practice good financial habits won`t be rewarded with positive information on their credit report. The second one, and the one that the CPFB is concerned with, is the high fees associated with prepaid cards.
Prepaid cards are notorious for charging customers fees every time they turn around. Some of the things that prepaid cards typically charge fees for:
- Activating the card
- Loading money onto the card
- Withdrawing cash from an ATM
- Checking a balance
- Making a call to customer service
- Requesting a copy of a statement
Just for example, the Approved Card from Suze Orman charges a monthly fee of three dollars, along with a cash withdrawal fee of two dollars. That`s a bargain next to some cards, which may charge as much as $14.95 to activate the card and a monthly fee of $9.95, in addition to fees for loading money and withdrawing cash. Typical prepaid card fees can easily add up to $50 or more each month, depending on how heavily a customer uses the card.
Rules and Regulations
The CFPB has not yet said what regulations they`d like to put in place for prepaid cards, merely that they are launching an initiative, the details of which were expected to be revealed this week. Once they make their plans public, they will accept feedback until July 22 and put together a full proposal at the beginning of next year.
What sort of standards might be put in place?
- Prepaid card issuers may have to be better and clearer about disclosing fees to customers.
- Issuers could be required to tell customers whether their money is insured by the FDIC in case of a bank failure – bank accounts are covered, but not all prepaid cards are.
- Limiting consumer liability for fraudulent charges – prepaid cards are not required to offer zero-liability fraud protection.
For more on the proposed CFPB prepaid card regulation initiative, follow Credit-Land.com on Twitter: @creditlandcom.