Finally, Robust Protections for Prepaid Accounts

The Consumer Financial Protection Bureau’s (CFPB’s) prepaid rule went into effect in April, concluding an effort that the agency started in 2012. This rule gives prepaid card and account users protections that are common on other forms of electronic payments, like credit cards and debit cards, while preserving the unique features that make prepaid cards attractive, such as the ability to control spending and avoid overdraft fees. Prepaid cards work similarly to debit cards except money is not in a checking account. (The rule does not apply to gift cards that can be used only to pay one company.)

The CFPB rule protects the 23 million U.S. adults who use prepaid cards to manage their financial lives, plus many more who use online and mobile payment accounts such as PayPal, Venmo, and Apple Pay Cash. It is especially important for the nearly 4 million “unbanked” adults who rely on prepaid accounts as a substitute for checking. Research by The Pew Charitable Trusts has shown that prepaid customers tend to have lower incomes and often choose the accounts to avoid overdrafts, check-cashing fees, and debt—or, more generally, to control spending.

By ensuring that all prepaid accounts are protected against overdraft fees, finance charges, and loss of funds due to malfeasance, the CFPB made certain that consumers can rely on prepaid accounts across the industry as budgeting tools. The prepaid rule establishes three especially important consumer protections:

• Limitations on when credit or overdraft can be offered to prepaid customers and regulates both as credit.
• Recourse against fraud and theft similar to checking accounts.
• Standardization of disclosures to help consumers compare products, see the most important fees, and choose the account that best fits their needs.

Any overdraft that is offered via a prepaid account will now be treated and regulated like credit, meaning payments would be made over time and not in one lump sum, and lenders would be required to set underwriting standards and disclose the annual percentage rate, among other consumer protections. This is a pivotal change that should serve as a precedent for checking accounts in the future. Overdraft transactions at banks are still not regulated like credit even though a third of “overdrafters”—those who overdraw their account and are charged a fee—report using them this way. If overdraft fees on checking accounts were calculated as an interest rate, costs would often be equivalent to 17,000 percent. This rate is so high because the fee often exceeds the transaction amount and full repayment is automatically taken from the next deposit to the account. Nearly three-fourths of prepaid card users without a checking account are looking to avoid such exorbitant fees.

Before the rule went into effect, consumer protections against theft and loss of funds depended largely on the payment company’s policies. Prepaid accounts will now have protections similar to checking accounts against fraud, unauthorized transactions, and payment errors as long as the consumer makes a timely report and registers the card.

The CFPB took care to apply these consumer protections broadly, so that prepaid accounts are covered regardless of whether the consumer accesses it via a plastic card, computer, or mobile app. This will keep companies from circumventing the rule by offering online-only prepaid accounts and the protections will remain relevant even as financial sectors continue to innovate.

Prepaid customers have long needed strong protections, and Pew congratulates the CFPB for implementing this rule.

Nick Bourke is the director and Rachel Siegel is a senior associate for The Pew Charitable Trusts’ consumer finance project.