The Federal Deposit Insurance Corp. and Consumer Financial Protection Bureau are concerned these days about two related trends: the rising numbers of "unbanked" Americans and the proliferation of prepaid debit cards issued by companies like NetSpend and GreenDot that are popular with people who don't use traditional checking accounts.
On its face, these trends appear both complementary and worrisome. People abandoned or poorly served by traditional banks often rely on alternative financial tools, like check-cashing services and pawn shops, notorious for high fees and gotcha penalties. And prepaid products have also for years been criticized for high fees and predatory marketing.
Happily, the overall picture today is not so grim. Newer prepaid offerings are increasingly indistinguishable from traditional bank accounts, even though they are not commonly understood — or regulated — that way. Which means the number of unbanked consumers is actually not rising. It also means that a maturing prepaid industry can help provide all Americans with plentiful access to non-predatory financial services, even if they don't live near a bricks-and-mortar branch, or would rather not set foot in one.
But in order for that future to come to pass, policymakers and regulators need to start treating prepaid accounts as the bank accounts they effectively are, and supervise them accordingly. Regulating prepaid cards as distinct from bank accounts runs the risk of creating loopholes, or allowing companies to game the regulatory system and elude oversight.
As the 2008 financial crisis demonstrated, this kind of regulatory arbitrage can encourage bad behavior and prevent regulators from noticing systemic risks. Instead, we should have comparable regulations for bank accounts and prepaid cards. Consumer-focused regulations, in general, should reflect what financial products actually do, not the technicalities of who issues them or what legal status they hold.
First, some background.
A Federal Deposit Insurance Corp. survey this year found there are about 17 million "unbanked" U.S. adults, up from 14 million in 2009. Meanwhile, the share of American households using prepaid cards remained virtually unchanged from 2009 to 2011, at around 10%. What's changed is that prepaid cards have rapidly penetrated the unbanked market.
For those without traditional bank accounts, the percent of prepaid cardholders increased from 12% to 18%. And among people who used to have a traditional bank account but no longer do, known as the "previously banked," prepaid use surged from 19% to 27%. (Prepaid usage did decline among "fully banked" households from 8.1% to 7.3%.)
These trends—rising numbers of unbanked and rising prepaid use among them—are canceling each other out. About three million people without traditional bank accounts now manage their money with prepaid cards, which have come a long way from their gift-card roots. And yet the FDIC still counts these people as unbanked. That doesn't make sense in a world where prepaid cards increasingly offer all the features of a checking account—and, in fact, are bank accounts.
"We keep talking about the prepaid cards as if it's a separate, distinct animal," NetSpend CEO Daniel Henry told a Senate panel in March. "It's a bank account." Likewise, Jennifer Tescher, president of the nonprofit Center for Financial Services Innovation, told the panel that "at the end of the day, the prepaid card is a bank account."
After all, the money "loaded" onto a prepaid card doesn't actually sit on the card. It's typically deposited into a bank, often into an FDIC-insured account. At its core, the prepaid card does what a bank account does: Give customers access to bank deposits.
Indeed, you can these days do with modern prepaid cards pretty much anything you can with a checking account debit card: withdraw cash from ATMs, pay bills online, make electronic transfers between accounts, receive direct deposit and even deposit paper checks using a mobile phone. Meanwhile, banks are expanding "checkless checking" accounts and the FDIC has even tested a model bank account for unbanked consumers that's card-based.
So how should regulators respond to the convergence of prepaid card accounts and traditional bank accounts? For one, there should be a unified consumer protection regime that doesn't distinguish between types of personal banking products. That is, consumers should get the same protections whether they bank with Chase or with its prepaid offering, the Chase Liquid card.
There are already positive movements in this direction. The Consumer Financial Protection Bureau has received over 200 letters on its request for comment on prepaid card features, a first step in possibly writing new regulations. And in September, the Office of the Comptroller of the Currency cracked down on the use of prepaid cards as vehicles for payday loans.
Acknowledging that prepaid cards are effectively bank accounts raises other questions. Must we burden prepaid providers with checking account regulations that are arguably outdated or ineffective, such as the monthly statement requirement? If a prepaid card comes with FDIC insurance through a sponsoring bank, does the card's program manager (such as NetSpend) also need safety and soundness oversight? And should we allow prepaid cards to do without deposit insurance entirely, as in the case of American Express' new Bluebird card, which offers all the features of a virtual bank account, but operates under a money transmitter license?
There are no easy answers to these questions, but a first step to ensuring good answers is for regulators to ask the right questions. And the first question regulators should ask, then, is: Is there any good reason to treat prepaid operators and bank operators differently, now that they are essentially offering the same product?
Gadi Dechter is managing director of economic policy at the Center for American Progress. Joe Valenti is director of asset building at the Center for American Progress.