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Regulators look at prepaid debit cards

Prepaid debit cards may soon be subject to federal regulations requiring more transparent fee disclosures and increased financial protection.

The Consumer Financial Protection Bureau said Wednesday it is considering new consumer protections for the cards. Director Richard Cordray said he plans to bring more “safety and transparency” to the industry. The agency will seek comment from experts and the public on how fees are disclosed and on protection from unauthorized transactions.

Prepaid cards often come with fees associated with everything from calling customer service to using an ATM — users reported paying an average of about $2 every time they wanted to reload money on their cards, according to a study by Javelin Strategy and Research. That is significant for a product that is most popular among Millennials and consumers who make less than $15,000 a year, says Javelin President Jim Van Dyke.

Those fees can add up quickly and in many cases aren’t obvious until after consumers purchase the card, Cordray says. The cards also don’t have the same protections as debit cards for unauthorized charges or lost or stolen cards. “We have a duty to make sure these products are safe for consumers and that prepaid card managers do not make money by relying on tricks and traps,” Cordray said. Prepaid cards were used by 13 percent of consumers in 2011, vs. 11 percent in 2010, Javelin says. The industry is expected to grow by more than 40 percent in the next two years, says Mercator Advisory Group.

The cards are popular among unbanked and under-banked consumers. Users load funds on the card and use it like a traditional debit card. More credit card companies, including Chase and American Express, are issuing prepaid cards as they look for new customers and to replace lost revenue due to tighter restrictions on debit card fees.

Supporters of prepaid cards say many issuers voluntarily provide protections.

“Consumers have a huge number of protections already,” says Judie Rinearson, an attorney at Bryan Cave, which represents prepaid card companies. “There are a lot of other areas that probably require more focus than prepaid cards.”

But data show that consumers are using retailers, which are less regulated than banks, to obtain prepaid cards. The under-banked are heading to stores such as Walmart and Safeway to shop for prepaid cards 37 percent of the time, vs. going to banks 27 percent of the time, Javelin research shows.

Consumer advocates hope federal credit and debit card regulations would be extended to prepaid cards, such as rules that protect consumers from liability on charge errors and stolen cards, and prohibit credit card-type overdraft features.

“A big part of CFPB (getting involved) is creating a level playing field so people have the same rights and protections on prepaid cards as they do on a debit card,” says Lauren Saunders, managing attorney with the National Consumer Law Center.


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