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Federal Regulators Offer New Protections to Prepaid Debit Card Users

greendotU.S. regulators have announced new rules that will enable prepaid debit card users benefit from some basic consumer protections not currently being enjoyed as the industry continues to grow at an impressive pace.

The use of prepaid debit cards has grown significantly over the past several years, with these transitioning from mere gift cards to a replacement to regular checking accounts for millions of people. In 2012, around $65 billion was reportedly loaded onto these cards – that figure was double the amount for 2009. It is estimated that the amount loaded on prepaid debit cards will once again double by 2018.

The impressive showing in the prepaid card industry has come despite users not being able to enjoy many basic protections available for bank debit cards and credit cards. Users have often been subjected to high fees and inadequate disclosures among other concerns. But things are about to improve following new rules announced by the Consumer Financial Protection Bureau early Wednesday.

Changes required by the new rules, which comes into effect in October 2017, include clear disclosure of fees on packages containing prepaid debit cards. Charges for different activities, such as withdrawals, reloading and calls to customer service, will need to be detailed.

Fees charged on these cards have been compared to predatory payday loan websites like Landmark Cash by many consumer protection groups. The average fees paid by users are estimated at about $11 per month.

“Our new rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone,” CFPB Director Richard Cordray said in a statement.

Under the new rules, prepaid card issuers will be required to provide their customers with basic account information, including balances and transaction history, at no charge. Users will also now be able to enjoying protection for stolen or lost cards.

These changes will no doubt delight prepaid card users, who are mostly financially-disadvantaged people. Those who use these cards are largely Americans with lower incomes. Pew Charitable Trusts said users are more likely to belong to a racial minority, be young or make lower than $25,000 per annum. The global non-profit, non-governmental organization says about 27 percent of regular prepaid card users do not operate a bank account, based on findings from a study.

Prepaid debit cards are mostly sold in grocery or convenience stores. They are offered by companies such as American Express, NetSpend and Green Dot. Independent research firm Mercator Advisory Group estimates that more than $100 billion would be loaded on general-purpose, reloadable cards in 2016.

The new rules will also give card issuers greater room to provide overdraft services. The National Consumer Law Center, an organization which lobbied for these changes, estimates just two percent of prepaid debit cards currently support overdraft facility.

The new overdraft rule is a controversial one however. Consumer advocates had been calling for total removal of overdraft facility on prepaid cards since this exposes customers to exorbitant fees.

The CFPB requires prepaid card issuers to assess the ability of a customer to pay before providing a credit line. New accounts must also be subject to a 30-day waiting period before such offer can be made on them.

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