Making prepaid cards better for everyone

The Senate was set to vote recently on legislation to contravene regulations promulgated by the Consumer Financial Protection Bureau (CFPB) to provide more protections and legitimacy to the prepaid card industry.

Now, the legislation will not come to a full vote after the CFPB announced it would delay the regulations by six months. This six-month delay gives the industry more time to implement the regulations, and the CFPB time to tweak the rules related to digital wallets and limits on liability for unregistered cards.  This should satisfy even many of the toughest critics.

In late April I participated in the Payments 2017 Annual Conference in Austin, Texas, and the halls were filled with conversations about new developments in payment technology, making them faster and more secure. Such financial innovation is good for the majority of households but not always for those who are financially vulnerable.

Case in point: Nearly a third of Tennessee’s households are unbanked or underbanked. Many of these families are unable to receive their paychecks quickly by direct deposit and are turning to prepaid cards, a growing category in the payments industry.

For these individuals, cards on the Visa, MasterCard or American Express networks function like a checking account and can be used to set up direct deposits of wages or benefits.

Prepaid card accounts do not require a credit check and most do not allow for overdrafts, making them available even to those who cannot get a bank account.

So, while some of us may buy prepaid cards to control spending for our high school and college-aged children, firms like Walmart, KFC, McDonalds and Home Depot turn to prepaid cards to pay employees, typically lower wage workers.

Today, some prepaid cards come with a catch. Many have fees for everyday uses such as checking an account balance, calling customer service, withdrawing cash at an ATM or with a teller. Some have penalty fees for declined transactions or overdrafts.

While these fees may be reasonable, it is critical for those who rely on these cards to understand these charges. This is especially onerous for workers who are offered no viable option other than using payroll cards provided by their employers.

In addition, many prepaid cards do not have the same federal law protection against fraud, unauthorized charges and errors that bank debit cards have.

To address these issues, the new regulations give prepaid cards the same fraud protections as debit cards. The rules provide a simple, uniform chart of fees and allows people to check their account balances and transaction history for free. Under the new rules, workers must be told of the fees before they accept a payroll card and be reminded they have a choice. The rule caps overdraft fees and requires the fees to be affordable.

The rules will apply not only to physical cards but also to mobile and other prepaid accounts. Whether you access your account with a card or your smartphone, protections from hidden fees and unauthorized charges are important. That’s why the Center for Financial Services Innovation supports the prepaid rule.

These new prepaid regulations will be a welcome change for the one in eight Tennesseans that used prepaid cards in 2015. They will provide the field with needed guidance and further protect Tennessee workers.

Some lawmakers may still worry that the cost of the regulations will push prepaid cards out of reach, punishing those it was designed to protect. But that fear has been widely dismissed by many within the prepaid industry, including the leading provider, Green Dot, whose CEO supports the rules.

Tennessee Senators Bob Corker and Lamar Alexander should understand how these regulations truly protect all Tennesseans who use prepaid cards. I’m thankful our senators were pragmatic and waited for the CFPB to tweak the regulations to address industry concerns—instead of simply pulling the plug on critical consumer protections.

This post was published in the May 17, 2017 issue of the Tennessean. M. Eric Johnson is the Dean of Vanderbilt’s Owen Graduate School of Management and serves on Mayor Barry’s Economic Inclusion Advisory Committee.