More Questions Than Answers Regarding Consumer Bureau’s Prepaid Plans

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 (see story).

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 (see story).

“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 (see story).

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 (see story).

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 (see story).

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

“What I’m hearing is that the focus will be on making sure that it’s not confusing to the least-sophisticated consumer on what fees are charged and when those fees are charged,” he says.

Consumer-advocacy groups contend fees represent one the biggest problems facing the industry, Smith adds.

Indeed, one consumer group, the National Consumer Law Center, released a report in May criticizing prepaid debit cards related to unemployment benefits (see story).

The group is urging the bureau to ban overdraft and other “unfair” fees and to improve rule transparency and competition by requiring issuers to place all fee schedules in a central location so states and consumers “can compare who has the best hand.”

Smith contends the consumer groups will have little influence on the bureau but believes they are making enough noise to warrant attention.

“Where there’s smoke, there’s fire,” he says.

Paul Tomasofsky, president of Two Sparrows Consulting, disagrees with Smith and believes consumer-advocacy groups will play a significant role in the bureau’s actions. But those groups should stay focused and truly represent consumers’ best interests, he says.

“Consumer groups are wonderful when they really are being the voice of the consumers, and that is a difficult thing to do,” Tomasofsky says. “What exactly does it mean to be the voice of the consumer when the consumer has multiple voices?”

Tomasofsky is concerned the groups, and even payment trade associations protecting their interests, will push positions that do not necessarily benefit those they represent. “It’s very difficult to stay on the right side of the line there and not become a zealot with blinders on,” he says.

Consumers Union is perhaps the most vocal group and the one asking the bureau to confront mobile payments.

In June, the group released a report suggesting the emerging U.S. mobile-payments market could be putting consumers at risk for fraud (see story). 

The organization is optimistic the bureau will examine mobile payments at some point. “They do have the jurisdiction to provide the strongest protections for consumers,” Michelle Jun, a staff attorney for the organization, tells PaymentsSource.

Tomasofsky believes it would be a mistake for the bureau to make rules affecting mobile payments while the technology is still evolving.

“Predicting the future is dangerous for anybody,” he says. “And trying to put regulations on predicting the future is even more dangerous.”

Whatever the bureau decides regarding any payment type, its rules will not sit well with everyone. 

“This organization’s task is something so large, they are not going to make everyone happy,” Jackson says. “I expect after the first year to hear some grumbling about the [bureau] not living up to its mandate.”

Companies that have done what they can to “self-regulate” will suffer in the end for the “bad apples,” Tomasofsky says.

There might not be a better example of that than the ill-fated Kardashian Kard. The now-defunct product might have put the prepaid debit card industry in a bad position in the few weeks it was available.

The charge for the card was $59.95 for six months or $99.95 for a year, and the price included the card’s $7.95 monthly fee and an initial load fee of $5. Though the card’s monthly fee structure was somewhat similar to other offerings, the initial fee caused sticker shock among many watching the industry (see story).

UniRush LLC, founded by hip-hop music and fashion mogul Russell Simmons, changed its fee structure shortly after the Kardashian Kard was shelved (see story). Under its previous fee structure, the Visa-branded RushCard and Baby Phat cards came with a $19.95 purchase price that was restricted to a pay-as-you-go plan. That plan also included a $1 fee for each transaction capped at $10 per month and a $1.95 ATM withdrawal fee.

The company’s Diamond card had a $3 purchase price and a flat $3.95 monthly fee, and cardholders could conduct free signature-based purchases and two free ATM withdrawals per month. Those options were not available with the other cards

Under the new fee structure, holders of UniRush’s cards pay monthly fees ranging from $3.95 to $14.95, depending on which plan they choose for all three cards.

UniRush representatives did not return calls seeking an explanation of the company’s card-policy changes.

But the policy language on RushCard’s website indicates UniRush eliminated the earlier restrictions. The monthly plan only was available with the Diamond card. All other fees in the pay-as-you-go plan and the monthly flat-fee plan remain the same.

UniRush made the change in response to the backlash the Kardashian product caused, some observers believe.

Consumers and media pressure, not regulations, helped bring change in that particular situation, Tomasofsky notes.

“Right there, I think the [free] market worked,” he says. “The buyers are showing what they prefer. Some things just take longer to work themselves out.”

The bureau, however, might not be afforded the luxury of time as it sets out to potentially change the payments landscape.

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