CFPB Meddles in Prepaid Card Market

Note from the Publisher:  Listen, fintech is an EXTEMELY wide category, and it’s impossible to be an expert in it all.  We know that and that’s why we write in a general, easy to digest format, so you can absorb the essence of the story rather than worryiing about all the legal or regulatory minutiae.  So consider this story within that genre.  The Consumer Fraud Protection Bureau (CFPB) Division of the US Federal Reserve has issued a ruling that will take effect in October, 2017 and significantly affect the prepaid card market.  Now understand, many people use these because they fall within the “underbanked” category, and others use them for privacy.  But the Fed now wants to have more regulatory oversight on these that will affect both the banking and other industries who issue them.  Anyway, it’s just important to understand that there will be far more regulatory oversight on this industry beginning Q42017.

Beyond Compliance, the Precedent and the Opportunity this Rule Represents

The Consumer Financial Protection Bureau’s (CFPB) Prepaid Final Rule adds significant compliance requirements to prepaid products that will be especially cumbersome for non-bank issuers unfamiliar with Regulation E and Regulation Z. Reading between the lines, however, this rule will potentially have lasting effects on all financial institutions, even those that do not offer prepaid products. Its philosophy and mandates provide likely clues for overdraft rulemaking, still anticipated as a high priority by the CFPB.

On the other hand, the rule is likely to cause a significant shakeup in the prepaid product industry, presenting financial institutions with a timely and unusual opportunity to attract the difficult-to-reach unbanked and underbanked customer populations.

Responding to the Prepaid Final Rule Requirements

According to the CFPB, “Prepaid accounts are among the fastest growing consumer financial products in the United States.” Its news release announcing the prepaid rule notes that less than $1 billion was loaded onto prepaid products in 2003, but nine years later, that total had risen to almost $65 billion. Until now, these alternative financial products, which consumers use much like debit cards, were not subject to all the regulations that apply to traditional financial products.

On Oct. 1, 2017, that will change as part of the CFPB’s effort to alleviate consumer concerns with these products. The CFPB’s October Monthly Complaint Snapshot, published just three weeks after the Prepaid Final Rule, sheds light on the CFPB’s perspective two years after it began accepting complaints in this category: “As of October 1, 2016, the Bureau had handled approximately 6,000 prepaid product complaints.” The three biggest complaint areas—unauthorized transactions, product registration difficulty and error-resolution problems—closely mirror the rule’s regulatory requirements.

Beware if Your Bank Offers a Digital Wallet Product

Financial institutions may assume this rule does not apply to them if they do not offer reloadable prepaid cards, but this rule includes multiple digital banking services–one in particular–that many banks offer today: digital wallets.

In its summary, “What to Know About CFPB’s Prepaid Card Rule,” the legal news source Law360 explains that, “In particular, digital wallets capable of storing funds (and not simply storing payment credentials) that can be used, for example, for purchases at multiple unaffiliated merchants or to conduct P2P transfers are considered ‘prepaid accounts,’ even if only a portion of the wallet can store funds, and even if the consumer does not use the funds-sharing functionality of the wallet.”

The full list of covered products per the rule includes the following:

  • Prepaid cards, including general purpose reloadable cards
  • Digital wallets
  • Person-to-person payment products
  • Other electronic prepaid accounts that can store funds, such as payroll, student financial aid disbursement and tax refund cards, as well as certain government benefit cards”

Source & Full Story at CSIWeb