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Ever since 2010, federal regulators at the Consumer Financial Protection Bureau (CFPB) have been taking a hard look at prepaid cards to make sure that they do not overcharge consumers and engage in sneaky tactics that lack transparency.
You may recall many issuers of prepaid cards coming under harsh criticism in 2010 for charging fees for such things as talking to a customer service representative or for withdrawing money from your own account. The card companies were essentially acting in an unregulated environment and seemed to be testing the limits of what they could get away with before government agencies intervened.
Celebrity-Sized Fees for Cardholders
One of the most notorious instances of that kind of behavior by a prepaid card company was related to the highly publicized Kardashian Kard, which was marketed toward teenagers.
The Kardashian sisters partnered with a financial institution to launch their branded prepaid card with the marketing tagline “Take us with you Everywhere.” They soon pulled the plug on that plastic as complaints mounted, and the card was subject to review by the Attorney General’s office in at least one state.
One of the most outrageous fees was a $6 fee just to cancel the account. That publicity was so bad that the Kardashians distanced themselves from the venture and the card never got off the ground.
The Popularity of Prepaid
Growth in the prepaid niche has exploded during the past five years and consumers will load about $80 billion onto their cards this year, compared to less than half that amount in 2010. Part of the reason, according to the results of a recent study on the Millennial Generation, is that many younger consumers only use prepaid cards and don’t have full-fledged credit cards, largely due to high debt from college tuition.
Banks have taken note of that fact, which is why competition in the prepaid niche has heated up and why more varieties of prepaid cards – including those that allow overdrafts – are now available in the marketplace.
Major players like Wal-Mart and American Express started entering the prepaid card arena with cards that had much more reasonable fees and charges. That has helped to shift the landscape in the prepaid niche as competition has encouraged card issuers to offer lower and less fees, and improve their customer service. The disclosures regarding fees that cardholders are responsible for have also become more straightforward.
Because of those self-imposed changes, this newest proposed regulation from the CFPB is not expected to address transaction fees. Although the CFPB has not yet officially commented on the proposal, the bureau has done testing on various models of disclosure forms for prepaid cards. They will also allow the public an opportunity to comment on the proposed rules before they finalize them.
The proposed changes would extend the reach of the section of the Truth in Lending Act that sets limits on the fees that companies can charge cardholders for overdrawing their accounts, and make them applicable to prepaid card.
The obvious shortcoming of that kind of oversight, however, is that virtually all prepaid debit cards do not allow you to charge more than the cash equivalent of what you have already loaded on your card. Once the money you put on the card runs out, the card just stops working. For that reason a law pertaining to overdrafts would only affect a very small number of prepaid card holders.
Regulation that Matters
What is more important is that the CFPB might be entertaining the idea of requiring more transparency and disclosure from prepaid card companies regarding all of the fees they charge. That would be a welcome change that would help to protect consumers who are often confused about fees and charges they have to pay when using prepaid plastic.