Prepaid Industry Offers Commonsense Solutions to the Biggest Issues Created by the CFPB’s Proposed Rule
This article appeared in the Spring 2015 Issue of Pay Magazine, the leading trade publication covering prepaid, mobile and emerging payments issues.
In the months following the CFPB’s release of its notice of proposed rulemaking on prepaid accounts , prepaid card industry participants spent countless hours analyzing the sizeable challenges created by the proposed rule. While the proposed rule poses significant concerns across all prepaid product types, three particular concerns stand out:
- Prescriptive disclosures that leave little room for innovation;
- Requirements for prepaid accounts offering overdraft or credit features that will drive valuable products and providers out of the marketplace; and
- An effective date that gives the industry far less time to comply than is needed.
This article discusses each concern, the distinct challenges it presents for the industry and the commonsense changes the industry is seeking in the bureau’s final rule.
Much of the industry’s discussion and comment on the proposed rule has focused on its detailed, substantial and prescriptive disclosure requirements. Specifically, the proposed rule would require, with limited exceptions, prepaid card issuers to provide consumers both short and long form fee disclosures before acquiring prepaid accounts. The proposal’s disclosure requirements reflect the bureau’s goals of ensuring consumers have access to the fee information most important to their financial decision making process before they open a prepaid account and facilitating comparison shopping among prepaid products. The requirements also reflect the bureau’s concern that, left unchecked, industry participants may attempt to circumvent its requirements by designing products and fee structures that place their products in a more favorable light in consumers’ eyes.
The disclosure requirements present a number of difficult challenges for the prepaid industry.
- First is the cost of providing two separate consumer disclosures with redundant information, which, as the bureau’s own testing indicates , is likely to overwhelm consumers with the sheer amount of information they’re receiving.
- Second is the one-size-fits-all prescriptive approach the bureau has taken toward the short form. Many in the industry believe the bureau’s lack of flexibility with the short form disclosures will stymie innovation, as the prescriptive approach leaves no room for alternative fee models or structures and fails to contemplate either unique products already in the marketplace or potential future advances.
- And, third is the short-form requirement to calculate and disclose annually the three most commonly charged incidence-based fees not otherwise listed on the short form. To comply, issuing banks and program managers would need new processes and procedures to make these calculations and, potentially, to update packaging annually to reflect changes. The development, maintenance, production and shipping costs of this requirement would be huge, not to mention the negative ecological impacts. And, the question “For what purpose?” cannot be avoided as the incidence-based fee requirement is likely to create a disclosure that, while compliant, is likely to be confusing in the extreme—and possibly misleading—to consumers attempting to compare prepaid products.
The industry’s response to the bureau’s proposed disclosure requirements and the challenges they present has focused on commonsense solutions that achieve the bureau’s goals of informing consumers, while avoiding undue burdens on industry participants and confusing consumers.
Specifically, the industry has proposed giving consumers a single disclosure of manageable length to be provided before a consumer acquires a prepaid card and containing the information necessary for the consumer to make an informed decision. The industry believes that such a disclosure, containing all material fees, coupled with a more detailed cardholder agreement, would provide consumers with a sufficient, manageable disclosure without overwhelming them with too much information. Alternatively, the industry has proposed extending the exception allowing retailers to provide the long form online or over the phone (and communicating the availability of the disclosure in these formats) to all prepaid accounts regardless of how they’re acquired.
With regard to the prescriptive nature of the short form, the industry has asked the bureau to provide more flexibility to better account for alternative fee models in the marketplace and potential future innovations.
Finally, the industry has strongly urged the bureau to eliminate the incidence-based fee requirement, which, again, would be costly for issuers to implement and maintain and, likely, confusing for consumers. As an alternative to the incidence-based fee requirement, the industry has suggested that the bureau simply select up to three additional commonly charged fees for inclusion in the short form. This approach will be easy to understand and implement and, to the bureau’s own goal, will better facilitate comparison shopping among consumers.
No single issue has generated as much discussion or generated as much industry concern as the proposed rule’s treatment of prepaid accounts that have overdraft or credit features. Specifically, the proposed rule applies Regulation Z (the Truth in Lending Act) and CARD Act requirements applicable to credit cards to any prepaid account that offers overdraft services, or a credit feature, subject to a “finance charge” as defined under the proposed rule.
The requirements under the proposed rule for prepaid accounts with overdraft or credit features create two issues of paramount importance for prepaid providers.
- First, while the bureau’s proposed requirements admirably aim to protect consumers from potentially harmful financial products, its solution moves the needle too far in the other direction, creating compliance requirements so onerous that they will effectively ban from the marketplace any short-term loan capability associated with a prepaid account.
- Second, applying the proposed rule’s requirements for prepaid accounts with credit features to “force-pay” transactions could effectively remove prepaid products from the marketplace, whether such products offer intentional overdraft services or not. A force-pay transaction occurs when a consumer has sufficient funds in his account to cover a transaction when it’s authorized but insufficient funds to cover the same transaction when it’s paid. The proposed rule doesn’t consider that the payment networks make “force-pay” transactions impossible to prevent in order to give merchants confidence that when a consumer uses a debit or open-loop prepaid card to make a transaction, the transaction amount will be paid. If the network rules did not allow “force-pay” transactions, many merchants would simply not accept debit or open-loop prepaid cards and consumers would lose the ability to use these products to buy certain goods and services. Coupled with the proposed rule’s ambiguous revised definition of what constitutes a “finance charge,” including force-pay transactions under the definition of credit could turn all prepaid cards into credit cards—at least for purposes of the proposed rule.
The industry’s approach to the bureau on this issue has been twofold. On the one hand, the industry has sought to clarify with the bureau how, in the real world, force-pay transactions occur and why their inclusion in the proposed rule’s restrictions on credit related services presents such dire problems for the industry. On the other hand, the industry is highlighting the importance of short-term lending associated with a prepaid account for many consumers and is seeking to work with the bureau to put parameters around such short-term lending that protect consumers, while not regulating a valuable product out of the marketplace.
A third area of significant concern for the industry is the bureau’s proposed effective date for the final rule. As proposed, the final rule would become effective nine months after publication in the Federal Register. Once final, the rule will require numerous changes to card packaging, websites and operations, and additionally will require development of new software to calculate transactions and fees in the manner required by the bureau. It is important to note that, if the effective date remains as is, the prepaid industry could be implementing these complex changes at the same time it’s engaging in a nationwide roll-out of EMV-enabled POS terminals and cards. Given these challenges, the industry doesn’t believe nine months is sufficient for implementation and is requesting the bureau to extend the time for implementation to between 18 and 24 months.
While it’s unclear how likely the bureau is to listen to the industry’s concerns or what changes, if any, it will make in the final rule, it’s worth noting that the bureau’s underlying goals in proposing the requirements to protect and educate consumers are shared by the prepaid industry. Both the bureau and industry participants alike support providing consumers with the information they need to make informed purchases, as well as protecting consumers from potentially harmful financial products and services. That the bureau and industry participants differ only in the manner to achieve these goals gives hope that changes can be made in the final rule that meet the shared goals, while at the same time alleviating the industry’s concerns regarding implementation of certain aspects of the proposed rule.
1 79 Fed. Reg. 77102 et. seq. (December 23, 2014).
2 Id. at 77150.