On Nov. 13, the Consumer Financial Protection Bureau published its long-awaited proposed rules applying regulations for electronic funds transactions to prepaid cards. The 870 pages of requirements are still being digested by practitioners. But it's clear that the scope of the regulation covers much more than prepaid cards, using a regulatory architecture that could limit payments innovation at a time of dynamic change.
As drafted, the rules appear to cover any consumer household account other than a traditional bank demand deposit or savings account. There are exclusions for health savings accounts and the like, and guidance that mobile apps that only store payment credentials for other accounts are outside the rule. But the core definitions encompass any account loaded with consumer funds on a prepaid basis that can be accessed for payments, ATM withdrawals or peer-to-peer transactions. This definition, as the CFPB acknowledges, will apply to many mobile wallets and virtual currency products.
It makes sense to have the same disclosure standards for similar products, which helps customers to compare and choose between them. But the regulatory architecture CFPB has chosen works against such standardization by proposing different rules for prepaid accounts than for checking accounts. Moreover, the proposal threatens to trap the burgeoning ecology of next generation digital wallets and cryptocurrency innovations in a consumer protection regime narrowly tailored to the unique characteristics of reloadable prepaid cards sold to underbanked consumers.
This is not a case where the urgent need for regulation outweighs the risks of limiting innovation. Issuers of general purpose reloadable cards have long interpreted Regulation E-the core consumer protections for electronic payment transactions-as applicable to their products. To the extent there was any ambiguity, since 2010 the Treasury's Fiscal Management Service has mandated adherence to those protections and Federal Deposit Insurance Corp. insurance coverage as a condition for prepaid card accounts to receive any ACH payments from the federal government. Moreover, as was discussed at CFPB's recent field hearing on the proposed rules, prepaid products are now being adopted by more mainstream consumers to whom the proposed rule's assumptions about the special protections needed for underbanked consumers may not apply.
The argument that GPR cards are fundamentally different than demand deposit accounts strains under close examination. The differences are more about marketing, distribution, and pricing than account structure. At last week's hearing, Green Dot founder and Chairman Steve Streit talked about how he invented the term "prepaid" in 1999 as a way to market his new bank debit card to people accustomed to prepaid phone products. Fifteen years later, the term has not accrued much more meaning as a term of art. Substantive differences are hard to identify at the back-end, and the legislative and administrative efforts to articulate such differences since 2009 reflect these challenges. Even in the CFPB's richly annotated rulemaking, it's hard to parse what the real distinction is between a bank-issued card account "loaded with funds on a prepaid basis" and a checking account debit card that accesses funds on deposit. There is very little difference from the consumer's perspective.
As the former general counsel of a mission-based prepaid program manager who argued for a level regulatory playing field that would let the industry compete head-to-head with bank products that failed to serve underbanked Americans, I am biased about these rules. I'm glad CFPB has finally released its proposals, and I applaud efforts to sharpen disclosures of complex products in the caveat emptor culture of click-wrap user agreements that no one reads. But as a private practice lawyer now focused on the next generation of payments, I'm worried the proposed rules will limit innovation in unintended ways.
The CFPB's proposed fee disclosure boxes for products sold on Wal-Mart J-hooks are probably not the best model for the digital wallets of 2020. And the consumer protections for electronic fund transfers adopted when Jimmy Carter was president may not be what consumers want or need in the 21st century, when money is increasingly digital. We should leave room for experiments like Bitcoin, cryptocurrency-based P2P lending and microcredit that let consumers make their own rules in an increasingly disintermediated payments ecosystem. As the industry, policymakers and consumer advocates digest CFPB's proposed rules, they should give careful consideration to how the regulations will shape the future-and push for a disclosure-focused regime that maximizes consumer choice and minimizes limits on innovation and product differentiation.
Christopher Brown is a business lawyer in Austin, Texas. He was the general counsel of NetSpend Corporation from 2007 to 2011 and counsel emeritus from 2011 to 2013. Follow him on Twitter @NB_Chris.