Monday, March 16, 2015

Will new prepaid payments rules improve or hinder the development of the prepaid industry?

Prepaid cards are growing in popularity in today’s payments world with consumers becoming increasingly reliant on prepaid products in order to purchase goods and access funds. Director Richard Cordray of the Consumer Financial Protection Bureau (CFPB) predicted a total dollar value of general purpose reloadable cards to grow to around $100 billion by the end of 2014. The CFPB decided in 2014 that there needed to better rules in order to help to protect users in a way that is more similar to the security that comes from a credit or debit card.

Towards the end of 2014, the CFPB proposed new rules for prepaid accounts that will create amendments to the Electronic Fund Transfer Act and Truth in Lending Act. The rules fall under 4 main categories:

  1. Credit Protections – relates to credit products in prepaid accounts. Now means monthly billing statements, allowance of time to pay debts, late fees and limitations on fee and interest charges.
  2. Prepaid Protections – allow prepaid users to have the same protection as they would receive with a normal checking account. This includes easy access to account information and lost-card and fraud protection.
  3. Prepaid/Credit Distinction – rules to be implemented in order to distinguish between credit products and prepaid accounts.
  4. Prepaid Fee Disclosures – rules in order to standardise upfront disclosures and that card agreements must be publicly accessible. 

The rules will exclude cards that are marketed and labeled as gift cards or certificates. Also excluded are flexible spending accounts, medical savings account, health reimbursement arrangements and health savings accounts.

So are these rules going to be advantageous in the prepaid payments world? The general consensus is yes; much of the 870 page proposal is widely considered to be reasonable. The rule allows credit to be offered and will mean a decline in hostility from regulators in regard to the prepaid industry providing credit, so a measure of regulatory consistency has now been provided. Providers are now allowing check writing and bill paying to help persuade cardholders to use prepaid payments as their primary banking platform.

However the issue that has been raised by many in the industry is that the rules will stifle any future innovations into digital wallets, person-to-person payment systems and cryptocurrency products. The CFPB, some believe simply have too much power and so rulings like these tend to go unopposed. The Bureau has the power to break businesses due to its huge influence. The industry tends to accept new rules and regulations in the fear that if they say no there could be negative repercussions.

To me, looking in from the outside of the industry, it looks as if the rules will be advantageous to the ever-growing industry at present. Providing security and the ability to pay debts, limiting interest charges amongst other plus points will continue to increase the popularity of prepaid payments. However stifling the potential for development and innovation may in the long run mean a limit to longevity if another disruptive innovation within the payments world comes along.

About the Author: Harry Kempe, a marketing intern at IIR USA, who works on various aspects of the industry including social media, marketing analysis and media. He is a recent graduate of Newcastle University who previously worked for EMAP Ltd. and WGSN as a marketing assistant on events such as the World Architecture Festival, World Retail Congress and Global Fashion Awards. He can be reached at

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