New CFPB rules on prepaid debit cards protect unbanked

By Kevin Cash, former staff writer for NerdWallet where he covered topics revolving around credit and credit cards.

The CFPB’s rules on prepaid debit cards have changed in a way that force issuers to make rules and fee schedules more transparent.

The goal of the updates — which include issuing a Schumer-box-esque form with every card — is to provide “clear, upfront information about [prepaid card] fees so you can know before you owe and shop for the best deal,” according to a press release from the Bureau.

Moving forward, every issuer must include a short-form disclosure with their prepaid cards. The disclosure will outline explicit costs associated with:

  • Monthly service fees
  • Per-purchase fees
  • ATM-withdrawal fees
  • Cash-reload fees
  • Balance-inquiry fees
  • Inactivity fees

A more detailed long-form disclosure will also be included with each card.

Forcing all prepaid card issuers to include this information works to stifle companies that generate revenue through sneaky fees often missed by cardholders. Card fees, which may seem small individually, total to an average of $300 per year, a NerdWallet study found. Opening the curtain on fee structures will — in theory — make the market more competitive, while reducing costs for prepaid card users.

For unbanked — and lower-income — individuals, who regularly use prepaid cards out of necessity, a reduction in fees could have a large impact: According to a 2015 report from Pew, “more than 8 out of 10 unbanked prepaid cardholders have annual household incomes below $50,000—with about one-third under $15,000 per year.”

Another major component of the changes lies in how fraudulent activity is handled on prepaid cards. Prepaid cards have historically included messages that warn users to, “Treat this card as cash.” If a prepaid card was lost or stolen, the original cardholder would likely lose their money as if they had dropped cash in the street.

The new rules align the protections associated with prepaid cards — which were nearly non-existent prior — to those granted to credit cards. Namely, if a card is lost or stolen and the cardholder reports that activity to the issuer, the consumer’s liability will be limited to $50.

Likewise, card issuers are now legally obligated to resolve and investigate fraudulent transactions and account errors within a reasonable time, or else risk crediting the cardholder for the amount in question themselves.

Other provisions include free and easy access to account information such as account balance, transaction history, and fees charged. In the past, this information was generally held captive behind walls of fees.

Though most of the new guidelines won’t go into effect until October 1, 2017, these protections represent a major step forward for the prepaid card industry, on which so many of the unbanked rely in their daily lives. 

For a more comprehensive version of the new rules, consult the CFPB’s official press release.

Written on October 7, 2016

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