Legislative challenge to prepaid rule is an affront to consumers
A group of Republicans senators is still trying to use the Congressional Review Act to challenge the Consumer Financial Protection Bureau’s prepaid card rule. Yet much of the financial services industry does not appear to be on board with their effort. For good reason.
The common-sense rule, which would go into effect in one year under a CFPB proposal to delay its implementation, gives prepaid cards the same protections against fraud and unauthorized charges that debit cards already have, and adds new fee disclosures to combat the hidden fees — including, on a few cards, overdraft fees — that have plagued prepaid and payroll cards.
Yet lawmakers led by Sen. David Perdue, R-Ga., have mounted a legislative attempt to overturn the rule employing the rarely used Congressional Review Act, which allows Congress and a sitting president to reverse regulations issued in the previous administration with simple majority support. The CFPB released its final rule in October, and the time to challenge it runs out in May.
However, the prepaid card and banking industries have largely passed on backing the move, prompting questions over who is pushing for it. The largest prepaid card company, Green Dot, supports the CFPB rule. Trade groups such as the American Bankers Association, the Credit Union National Association, the Independent Community Bankers of America and the Network Branded Prepaid Card Association have not come out in support of the Congressional Review Act challenge. Neither have major prepaid card issuers like American Express or JPMorgan Chase.
Providing consumers and employees with clearer information about fees and prepaid card choices will not only help card users, but also will help banks, credit unions and employers that offer low-fee cards.
But with congressional floor time suddenly available following the collapse of the GOP health care overhaul bill, the push for a congressional review may have new legs. There are signs the effort to overturn the rule still has support from the prepaid card issuer Netspend and the Electronic Transactions Association.
When the CFPB rule came out, Netspend — the only major prepaid card company that has overdraft fees on its cards — said $80 million to $85 million in projected annual fee revenue would be eliminated by the regulation. Unfortunately, the rule does not prohibit overdraft fees, but it does give consumers a 30-day waiting period before signing up for overdraft features and requires hybrid prepaid-credit cards to comply with credit card laws.
Total System Services, Netspend’s parent company, is based in Perdue’s home state of Georgia, and has contributed to his political campaigns. Meanwhile, the Electronic Transactions Association’s president-elect is Chuck Harris, who is also the president of Netspend. In a December letter to lawmakers, the association said, “Use of the CRA to review and repeal this rule would be appropriate and important to protect consumer choice.”
Netspend’s business model is questionable since overdraft fees on prepaid cards make no sense. Indeed, 98% of prepaid cards are true to their name — they are structured not to overdraft and can only be used if the account contains sufficient funds. By design, these cards are heavily marketed to and used by lower-income consumers who have had trouble with overdraft fees and may have even lost their bank account as a result. Over 42% of unbanked or underbanked households used prepaid cards in 2015, according to the Federal Deposit Insurance Corp.
The Electronic Transactions Association claims that applying the CFPB rule to newer fintech products will stifle innovation. But the CFPB wisely chose not to make the rule obsolete before it even took effect by limiting the rule to physical plastic cards. Protection against unauthorized charges and hidden fees makes sense for fintech products too. Indeed, Financial Innovation Now, which represents the key mobile wallet and fintech providers (PayPal, Google, Apple, Amazon and Intuit), told me that it has not asked Congress to block the rule.
Groups that care about innovation — like the Center for Financial Services Innovation — support the CFPB’s prepaid card rule. In an op-ed for American Banker, two leaders of the CFSI wrote: “These new rules matter for consumers — not only because they are better protected with the products they use today, but because they'll be better off with the products they'll use in the future. This forward progress won’t happen if the rules are reversed.”
To be sure, some companies have some technical concerns about the rule. But the CFPB has made clear that it is continuing its industry outreach and will make adjustments if necessary. Indeed, the CFPB has already responded to industry concerns by proposing to extend the effective date by six months.
Prepaid card users have waited a long time for the basic protections that debit card customers take for granted. Congress should not throw them under the bus.