If you’ve been out of touch with the FinTech market recently you may have missed how popular prepaid cards have become. This is especially true when it comes to “open-loop” cards, which are prepaid cards powered by a processor like Visa or MasterCard that can be used anywhere a credit or debit card is accepted.
These accounts now look and feel increasingly similar to an actual bank account, but haven’t been regulated nearly as much. Until now.
Today the Consumer Financial Protection Bureau, an arm of the federal government, finalized its new rules for prepaid cards. These rules have been in the works for a few years and will finally give prepaid card users the type of protections that a bank would have to offer. Interestingly, these rules will also apply to digital prepaid accounts like Venmo and PayPal.
Here are the most important changes:
Protection Against Fraud
The new rule will require card issuers to reimburse users for withdraws or purchases made if their card is lost or stolen. The issuer will have to reimburse consumers in a timely fashion for all fraudulent transactions past $50. This is almost identical to the fraud protections that actual banks have to offer.
Previously, prepaid card issuers didn’t necessarily have to offer any fraud protection at all, meaning if your card was stolen and the balance was spent before you could cancel the card you were out of luck.
Access to Information & Easy Resolutions
The rule also requires issues to make account information like balances available for free by phone, online and in writing. While this seems standard some shady prepaid card issuers have previously charged users to just see basic information related to their account. Since prepaid cards don’t have to provide monthly mailed statements to users (like a bank does), this rule will help consumers actually understand what’s happening to their account.
Issuers will also have to cooperate with customers to resolve errors in their account in a timely manner. Previously there were no hard rules on how an issuer was supposed to respond to complaints.
Easy To Understand Fees
This rule requires issues to create a new short, easy to understand form that informs customers about the fees associated with an account. These include withdraw fees, reload fees, periodic fees and more. Prepaid card issues have been known to secretly charge fees every month and even charge you to reload your account. So while this rule won’t necessarily stop that from happening, it will force the issuers to make it very clear to consumers what fees they charge.
The last major rule is interesting because it was a hotly contested issue when the rules were being written. Currently prepaid card issuers are allowed to issue credit to users (meaning they could spend more than is in their account and pay it back at a later date). Even though this sounds exactly like a credit card or overdraft offering, prepaid issuers have been allowed to do it without any of the protections that credit card companies or banks are forced to offer.
It’s a contested rule because some people wanted the CFBP to ban prepaid issuers from offering credit all together, since the point of a prepaid card is to limit spending to what is in the account. But the bureau decided to continue allowing it as long as issuers agreed to some new safeguards.
These safeguards include not offering credit to consumers unless the issuer has evaluated the customer’s ability to repay the loan (potentially via a credit check) as well as making sure customers have a reasonable time to pay back their debt before they are charged a late fee.
A Net Positive
Overall, the new rule and associated safeguards are good for consumers. If the government is going to let prepaid cards essentially act like bank accounts, they need to at least implement rules like these to make sure prepaid card issuers aren’t taking advantage of the unbanked and underbanked – two groups that tend to comprise low-income individuals and families.
The rules won’t go into effect until October 1, 2017, but are considered final after today’s announcement.