Proposed and recently enacted state and federal regulations regarding debit and reloadable prepaid cards have put card programs used for disbursing unemployment, Social Security and other benefits in serious jeopardy, a JPMorgan Chase & Co. executive tells PaymentsSource.
“I would say within two years, prepaid’s interchange potentially will be eliminated if not by regulation then by market practice,” Tracy Dangott, Chase vice president of public sector card solutions, tells PaymentsSource.
Reloadable debit cards are exempt from the so-called Durbin amendment in the Dodd-Frank Wall Street Reform and Consumer Protection Act, but Dangott believes prepaid card interchange soon will come under attack in the same way traditional debit card interchange did. If that occurs, it essentially would eliminate prepaid card programs that issuers manage for government-benefit disbursement, he adds.
“All of these states will either have to start paying for the program [which is free now] or they will go back to issuing checks, and it will be a reversal of the current trend,” Dangott says.
Chase issues prepaid cards to distribute unemployment benefits and manages the disbursement programs for 12 states. Overall, some 30 states use prepaid cards for similar programs. Every state touts the economic and practical reasons to make the switch from distributing checks. Check printing and postage savings usually total in the millions.
“Without interchange at the rates they have today, these programs are just not feasible,” Dangott says. “Banks like us will exit the marketplace because you’ll have to replace that revenue.”
Prepaid cardholder fees also are about to come under fire, Dangott says.
Sen. Robert Menendez, D-N.J., introduced a bill in December that would prohibit providers from charging fees for card inactivity, balance inquiries, overdrafts and other activities. It also would require disclosure of fees customer can be charged.
The bill failed to come to vote last year, but Dangott suspects it will pass later this year.
“We will have to abide by that law, and that means we’ll go back to every one of our clients and ask, ‘what do we do now?’” he says. “We’ll have to ask the states, ‘do we charge you, or do we charge the cardholder?’”
The Menendez bill is asking prepaid card providers to charge a single, flat and fair fee for all transactions instead of multiple fees for what are considered “everyday activities,” according to Suzanne Martindale, Consumer Union associate policy analyst.
Consumers Union, publisher of Consumer Reports, is a Yonkers, N.Y.-based independent, nonprofit testing and information organization serving consumers nationwide. The body worked closely with Menendez on the proposed bill.
“If you have a flat, monthly fee upfront, it gives consumers a chance to decide if they want the card,” Martindale tells PaymentsSource. “We want to see this for all types of prepaid cards.”
Consumers Union views the Menendez bill as a blueprint for the Consumer Financial Protection Board, which Congress created in the Dodd-Frank Act. The board will have the authority to regulate a wide variety of consumer financial products, and that may include reloadable prepaid cards.
“When you have federal regulations in place, then you have administrative enforcement mechanisms,” Martindale says. “If you have a bad apple out there, the board has the authority to go after them for violating their rules.”
Prepaid provider support for the Menendez bill appears mixed.
Martindale claims Green Dot Co. is in favor of it to bring others in line with its low fees. “Green Dot has said what they don’t like is that they’re the good actors and get lumped in with the bad actors,” she adds.
Green Dot, which will manage a tax-refund card of the IRS, did not respond to a request for comment.
Dangott believes the government-benefits market has self-regulated itself in terms of fees. “I can’t go in and gouge and just market my way through it,” as opposed to what general-purpose reloadable prepaid card marketers can offer, he says.
“Professional procurement offices” that run complicated analyses of provider bids scrutinize Chase’s state contract proposals, Dangott says.
This sector has “self-regulated itself through competition, which is the way it should work,” he says.
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