One of the hottest financial products out there will soon get a little reining in. Prepaid debit cards, which are used by some 7 million Americans to buy goods, pay bills, and make other purchases without actually having a checking account or credit card, have been gaining popularity. But now the mostly unregulated payment method is facing scrutiny and the Consumer Financial Protection Bureau (CFPB) plans to place new rules on prepaid cards.
This week the bureau began the process of forming new regulations on so-called general purpose reloadable cards. According to the CFPB, the amount of money loaded onto prepaid cards is expected to grow at an average annual rate of 45% through 2014. In 2011, $57.2 billion was loaded onto prepaid cards.
Although more people are using the cards, they don’t always realize that they are not regulated in the same way that typical credit and debit cards are, the CFPB argues. Before now, prepaid cards have been largely unregulated by federal rules and, unlike traditional debit and credit cards, were untouched by the Dodd-Frank financial regulation overhaul.
Seeing an opportunity to tap a new market with few restrictions on fees, traditional banks have been eager to enter the prepaid card game. Before recently that industry was dominated by relatively few non-bank players such as Green Dot and Netspend. Wells Fargo, Regions, and JPMorgan Chase all have launched prepaid products within the past year.
Prepaid cards are typically used by people who do not have or can not qualify for a traditional checking or savings account. Critics argue that these fee-heavy cards take advantage of people with lower incomes. Some cards charge a monthly $5 maintenance fee and charge customers to check balances or reload cards with money.
Likely included in the new regulations on prepaid cards is a protection for lost or stolen cards. Right now issuers are not required to reimburse funds used when a prepaid card is lost or stolen. Applicable fees and terms and conditions of cards also will be required to be more visible.
The Bureau will take public comment on the issue through July 22 and an early draft of the new rules could be ready by early next year.