Prepaid cards have been a financial lifesaver for the millions who are without access to traditional banking. While prepaid cards offer great features like bill pay and the ability to make online payments, the products aren’t without complaint.
In February 2016, the Consumer Financial Protection Bureau reported the top prepaid card complaints as: consumers being unable to access funds on their cards, expired cards being re-issued without the previous balance, inability to access funds when a charge was under dispute, and an exorbitant amount of fees.
In response to these complaints, the CFPB has adopted new rules for prepaid cards. The rules, similar to those for checking accounts and credit cards, aim to protect consumers from loss of funds and from being unfairly charged for prepaid cards.
While the rules seek to protect consumers from unfair practices, they also regulate prepaid cards so much that it could hurt consumers in the long run. Joseph Colangelo, for American Banker writes:
“The bureau’s new rules are poised to disrupt, if not destroy, this industry and eliminate thousands of prepaid options from retail racks and online stores. Simultaneously, the rules will fundamentally transform the nature of the products themselves, making them function more like the heavily regulated banks they sought to replace.”
The new rules include:
- Free and easy access to account information, by phone, online, or email unless the financial institution provides a periodic account statement.
- Rights with error resolution. Financial institutions are required to cooperate with disputes and restore missing funds where appropriate.
- Protection from lost cards and unauthorized transactions. Consumers will be liable for up to $50 in unauthorized charges as long as the lost or stolen card is reported immediately.
Prepaid cards also have to disclose pricing information upfront and in a way that’s easy-to-understand. The CFPB has made similar pricing disclosure rules for other credit and loan products. And similar to credit cards, prepaid card issuers are required to make their card agreements publicly available.
Prepaid cards that act as a credit product, e.g. the user can send more funds than is available on the card, are extend protections similar to those for other credit products. This means these prepaid card issuers:
- Must consider a consumer’s ability to pay before extending credit
- Provide regular billing statements including information about repaying the debt
- Give consumers at least 21 days to make payment before charging a late fee
- Give advance notice of an interest rate increase, unless the consumer has missed back-to-back payments
Prepaid card issuers wait 30 days after a new account opening to offer the credit feature and are prohibited from seizing a cardholder’s prepaid funds balance to repay an outstanding credit balance.
The new rules become effective for accounts issued after October 1, 2017.