Prepaid Debit Cards May Be Next Focus of U.S. Consumer Agency
The Consumer Financial Protection Bureau may call for public comments on how to improve fee disclosure by issuers of prepaid debit cards, the fastest- growing segment of the payment-card industry, according to a Treasury Department official.
Rules could squeeze the $1.4 billion in fee revenue that firms such as Wal-Mart Stores Inc., Green Dot Corp. and NetSpend Holdings Inc. will collect by 2014, said Gwenn Bezard, research director of the Boston-based research firm Aite Group. Americans will more than triple the amount they put on the cards each year to $104 billion by then, Aite has calculated.
The bureau may issue a notice calling for comments on possible rules on prepaid debit in the spring, said the Treasury official, who spoke on condition of anonymity because the decision isn’t final. The agency is focusing on disclosure and isn’t aiming to put limits on fees, the official said.
The initiative would be the first indication of what regulations the agency could pursue outside of mortgages and credit cards, the two areas most cited by Elizabeth Warren, the special Treasury adviser charged with setting up the bureau.
Warren addressed the topic in a Nov. 30 letter to Senator Robert Menendez, a New Jersey Democrat who had introduced an unsuccessful bill to impose oversight on prepaid cards.
“We need prudent regulation to stimulate a transparent and competitive marketplace in which consumers are able to understand the product, figure out the costs, and comparison shop for the products that best meet their needs,” Warren said in the letter.
The consumer bureau, created by the Dodd-Frank regulatory overhaul and operating initially under Treasury’s auspices, may use so-called advanced notices of proposed rulemaking to gather information before its scheduled official start date of July 21, the inspectors general of Treasury and the Federal Reserve have said.
David Silberman, who heads the card markets unit at the bureau, has been consulting people in the prepaid industry through one-on-one meetings, the Treasury official said.
Prepaid debit cards, which often are sold from racks in supermarkets or small shops, aren’t linked to bank accounts. Because they can be loaded and reloaded with cash payments and aren’t limited to a specific retailer like gift cards, they have emerged as a key tool for people who don’t have bank accounts.
The cards, sometimes associated with celebrities, have largely escaped federal regulatory scrutiny. During the Dodd- Frank debate, Congress considered making prepaid cards subject to rules on “swipe” fees that retailers pay to debit card issuers. Hip-hop impresario Russell Simmons, who issues the prepaid RushCard, helped lobby to exempt the products.
‘Tool’ for Underserved
Simmons said in an interview that more regulation of disclosure should not interfere with RushCard’s ability to become a “financial well-being service” that might eventually offer loans, he said.
“This is a tool for people who are underserved, and as technology evolves, our prices go down,” Simmons said.
Kim, Khloe and Kourtney Kardashian, the sisters famous for their TV reality show, withdrew their own prepaid card from the market in November after Consumers Union, publisher of Consumer Reports magazine, publicized its various fees for checking a balance or speaking to customer service.
“That controversy produced an audible groan in the entire industry,” Judith E. Rinearson, regulatory counsel for the Montvale, New Jersey-based National Branded Prepaid Card Association, said in an interview.
‘Truth in Pricing’
Gail Hillebrand, financial services campaign manager for Consumers Union, said the consumer agency needs to consider limiting the number or types of permissible fees so that issuers don’t shift the costs around in response to regulation.
“It’s about truth in pricing, not setting prices,” she said.
Companies including NetSpend and Green Dot are the major players in the business, though processors including San Francisco-based Visa Inc. and Purchase, New York-based MasterCard Inc. make some money on it, Bezard of Aite Group said. Each prepaid card almost always has a bank behind it, though the business is very small compared with bank credit card issuance.
Brad Russell, a spokesman for Austin, Texas-based NetSpend, said that the bureau’s “new look” will “provide clarity” to the business.
“It is not being met with wringing of hands and gnashing of teeth,” Russell said in an interview. “We want to work with them.”
Monrovia, California-based Green Dot, in a filing with the Securities and Exchange Commission for the third quarter of 2010, cited the consumer bureau and possible disclosure rules and fee limits as risks to revenue and costs.
Rinearson said he worries that the new consumer bureau might not fully comprehend how the business works. “It is a very scary thing to be regulated by an agency that does not understand your industry,” he said.
Bezard said the passage of time may challenge both the industry and regulators, as new firms emerge and older ones improve their business models.
Already, Bentonville, Arkansas-based Wal-Mart “sent shock waves” through the business when it reduced fees in early 2009 on a prepaid card it markets with Green Dot, Bezard said. And the RushCard also reduced fees early this year.
“I wonder if regulation can change the fact that you already have serious price competition,” Bezard said.
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