More Questions Than Answers Regarding Consumer Bureau’s Prepaid Plans

US Banker  |  August, 2011

By Will Hernandez

Print Email Reprints Feedback

The Consumer Financial Protection Bureau opened its doors July 21, a day after this nation commemorated the anniversary of the first manned mission to the moon. And just like Neil Armstrong maneuvered over the moon’s rocky surface, the government’s newest agency might present the payments industry with some uneven terrain to navigate.

The bureau likely will focus on the mortgage industry at the start, some observers believe. And while the agency has made it known it will examine the prepaid card market, its specific intentions remain unclear. In addition, at least one consumer-advocacy group wants the bureau to address mobile payments.

What is clear is that the agency already has specific guidelines in place regarding consumer financial products and services. Elizabeth Warren, the Obama administration’s official in charge with setting up the bureau, testified July 14 in front of the House Committee on Oversight and Government Reform about the issues the agency will confront.

Created as part of the Dodd-Frank Act, the bureau will have the authority to regulate a wide variety of consumer financial products.

Many financial companies that are not banks will be subject to federal supervision for the first time, Warren told the committee. She specifically mentioned prepaid card providers in her testimony.

“One of the goals of the Dodd-Frank Act is to better protect consumers by helping to ensure that all providers of consumer financial services–banks and nonbanks alike–are treated similarly,” she said.

Ben Jackson, a senior analyst in the prepaid advisory services unit of Maynard, Mass.-based Mercator Advisory Group, believes the agency first will confront credit cards. The bureau already has released an example of a form consumers can use to file complaints against credit card issuers.

But the results of a Florida attorney general investigation could quickly change the bureau’s focus back to prepaid card providers, Jackson says.

Florida Attorney General Pam Bondi issued subpoenas in May to Green Dot Corp., NetSpend Holdings Inc., UniRush Financial Services LLC, AccountNow Inc. and First Data Corp. The subpoenas sought information about “possible hidden fees” on prepaid cards.

“The results of the Florida investigation could make prepaid loom larger in the bureau’s mind,” Jackson says.

Jackson believes American Express Co.’s move into the prepaid market with Serve also will get the agency’s attention. In June, Amex introduced a prepaid card that carries almost no fees.

Tim Smith, senior vice president at Firstsource Solutions Ltd., says his prepaid clients are worried the bureau will scrutinize the industry more if banks decide to issue prepaid debit cards to make up for lost revenue caused by the Federal Reserve Board decision to reduce debit card interchange fees. Under a new Fed rule that takes effective Oct. 1, the new interchange caps will reduce the amount banks earn from debit card purchases to about 24 cents per transaction from the current average of 44 cents.

Louisville, Ky.-based Firstsource handles business processes such as collections, revenue management, back-office operations, and customer care for banks and other financial-services companies.

Prepaid cards also took a hit in the Fed’s final ruling.

For banks wanting to claim an exempt status for prepaid cards, cardholders must not be able to access funds in a card account using a check, the automated clearinghouse system, wire transfers or other methods.

That said, fees tied to prepaid cards would be the primary focus for the bureau, Smith believes.