The Consumer Financial Protection Bureau released final rules on prepaid accounts in 2016 to give consumers federal protections that already were available on checking accounts and credit cards. The rules have undergone several changes since then, but the strong protections that will be added remain intact.
The most recent changes came on Jan. 25, 2018, and included extending the overall deadline of April 2018 to April 1, 2019. They also limit fraud protections and the right to dispute errors to registered accounts, so you’re unprotected if you use an account anonymously.
“By making adjustments to the prepaid accounts rule, including providing additional time for compliance, the CFPB has taken a step to protect consumer access to prepaid products,” says Brian Tate, current president of the Network Branded Prepaid Card Association.
“Prepaid accounts are among the fastest-growing consumer financial products in the United States,” then-CFPB Director Richard Cordray said in a call with reporters in advance of the official announcement in October 2016. “Before today, however, many of these products lacked strong consumer protections under federal law.”
From 2003 to 2012, the amount of money loaded onto prepaid debit cards — typically used to make purchases and withdraw cash from ATMs — skyrocketed from $1 billion to nearly $65 billion, according to estimates by Mercator Advisory Group, a payments research firm.
» Want to compare prepaid options? See our list of the best prepaid debit cards
Types of prepaid accounts the rules cover
The rules will affect not only prepaid debit cards, but also other prepaid products such as digital wallets and some peer-to-peer transfer apps that hold balances, such as Venmo, PayPal and Square Cash.
Other prepaid accounts such as payroll cards, student financial aid disbursement cards, tax refund cards, and government benefit cards used to distribute unemployment insurance and child support also will be covered by the new rules, according to the CFPB.
However, gift cards, disaster-relief and health- and transit-related cards won’t be affected.
What you can expect
The rules will give prepaid accounts new federal protections — including requiring upfront, easy-to-understand disclosures on fees and other information — in line with those available on checking accounts and credit cards.
You’ll have the right to dispute errors and fraudulent charges on prepaid accounts; be protected against unauthorized transactions if the cards are lost or stolen; and be able to view account information online or by phone for free, like you can with checking accounts.
There’s one big exception to protections as a result of the Jan. 25 rule change, though: If a prepaid account is unregistered, then the issuing bank is not required to resolve errors or limit what you might be responsible for in cases of unauthorized charges. Only once an account is registered do these protections kick in, and they apply only for problems from that point onward. The CFPB views this change as a way to encourage more people to register their prepaid accounts.
Registering involves providing your personal information, which can include your Social Security number, to the prepaid company or bank, generally through an online form, to identify the account under your name. The process is similar to opening a bank account.
Additional requirements, similar to those for credit cards, will apply to issuers of prepaid cards and accounts that offer a credit component, such as a cash advance or overdraft option.
The issuing companies must ask you whether you want to opt into any service that lets you borrow money. If you choose to opt in, under the new rules, you’ll be notified via monthly statements of any fees you’re charged. You’ll have at least 21 days to repay any overdrafts and other debts before a prepaid company can charge a late fee, and that late fee must be reasonable. These rules surrounding repayment are a bit stricter than those for overdraft policies on checking accounts.
» Want more details? See what the new prepaid debit card rules say
Transparency and safety
“It’s a big win for consumers in all areas, especially [since] consumers will be protected against harmful overdraft fees,” said Thaddeus King, an officer for the consumer banking project at the Pew Charitable Trusts, in an October 2016 interview with NerdWallet. “That’s the reason that most consumers gravitate toward these cards.”
The nonprofit research group in Washington, D.C., has advocated for better consumer protections on prepaid debit cards for many years.
“We see the rules as very forward-thinking and very relevant in an evolving marketplace,” said Joy Hackenbracht, research officer on the project at Pew, in the same interview.
The Network Branded Prepaid Card Association, which represents the prepaid card industry, has had a different view.
“Instead of fostering financial innovation and inclusion, the CFPB’s rule will ultimately limit access to an essential mainstream consumer product that helps millions of Americans,” said Brad Fauss, former president of NBPCA, in an October 2016 statement to NerdWallet.
Fauss added that the new regulations on overdrafts for prepaid accounts may lead companies to drop that feature.
King, however, noted that most prepaid cards don’t offer overdraft services, so that part of the rule won’t affect issuers.
Overall, the rules aim to bring more transparency to a prepaid marketplace that’s been criticized for taking advantage of the unbanked and other financially vulnerable consumers.
Updated Feb. 8, 2018.