Prepaid cards, which are often bought at retail stores or online, are among the fastest growing financial products obtained by consumers, with money preloaded by a third party, such as an employer.
Because of consumers’ increasing reliance on these cards, the U.S. Consumer Financial Protection Bureau is toughening rules to protect card holders.
The CFPB’s rules will require prepaid companies to limit consumers’ losses when funds are stolen or cards are lost, protections common to bank- and store-issued credit cards. The Bureau also will require prepaid companies to “investigate and resolve errors, provide easy and free access to account information, and adhere to credit card protections if a credit product is offered in connection with a prepaid account.”
The popularity of prepaid cards has grown significantly. The amount of money consumers loaded onto “general purpose reloadable” prepaid cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012. The total dollar value loaded onto general purpose reloadable cards is expected to continue to grow to nearly $100 billion through 2014.
The Bureau is also requiring new “Know Before You Owe” prepaid disclosures that would provide consumers with clear information about the costs and risks of prepaid products upfront.
New Rules to ‘Close Loopholes’ in Prepaid Market
“Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts,” said CFPB Director Richard Cordray. “Our proposal would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”
Although many people use prepaid cards in addition to their regular bank debit cards and creidt cards, people who are “unbanked” — those who do not use traditional banking services — rely on them heavily. In a recent report, the FDIC found that people without bank accounts turned to prepaid cards in greater numbers.
Some of these prepaid products include use-anywhere prepaid cards, college campus cards used for financial aid disbursements, tax-refund cards, some government-benefits cards and prepaid cards that some companies use to pay employees.
The protections proposed by the CFPB are generally similar to those checking account consumers already receive and include:
Easy and free access to account information: Under the CFPB proposal, financial institutions would be required to either provide periodic statements or make account information easily accessible online and for free. Unlike checking account customers, prepaid users typically do not automatically receive periodic statements. The proposal would ensure that consumers are able see their account balances and a history of their transactions and fees.
Error resolution rights: The proposed rule would require financial institutions to work with consumers who encounter errors with their account. Currently, prepaid customers who are double-charged for a transaction or charged an incorrect amount may not be guaranteed a practical way to fix the problem. This proposal would require financial institutions to investigate errors that consumers report on registered accounts and to resolve those errors in a timely manner. If the financial institution cannot resolve an alleged error within a certain period of time, it would be required to temporarily credit the disputed amount to the consumer to use while the institution finishes its investigation.
Fraud and lost-card protection: The proposal would protect consumers against unauthorized, erroneous, or fraudulent withdrawals or purchases, including when registered cards are lost or stolen. Consumers receive this protection on their credit and debit cards, but it is not guaranteed on prepaid products. If consumers lose their prepaid card or find erroneous or fraudulent charges on their prepaid account, the rule would limit their responsibility for transactions they did not authorize and create a timely method for them to get their money back. As long as the consumer promptly notifies their financial institution, the consumer’s responsibility for unauthorized charges would be limited to $50.