Prepaid cards are about to get easier to understand and more secure.
The Consumer Financial Protection Bureau released final rules on prepaid accounts Oct. 5, 2016, to give consumers federal protections that already were available on checking accounts and credit cards. The rules, long in the works, won’t take effect until April 1, 2018.
[Update May 12, 2017: An effort launched in February 2017 to repeal the rules has failed. Seven senators had introduced a joint resolution calling for the new prepaid card rules to “have no force or effect,” but the window to vote on the resolution closed May 11 without a vote. So the rules are set to take effect, as planned, in 2018.]
“Prepaid accounts are among the fastest-growing consumer financial products in the United States,” 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.
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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.
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 get 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.
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. “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.
The Network Branded Prepaid Card Association, which represents the prepaid card industry, has 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, president of NBPCA.
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.