Lori Breitzke, E&S Consulting LLC, Double Diamond Group
Have you finished reading all 1,689 pages of the Bureau of Consumer Financial Protection (CFPB) “final rule” regarding prepaid cards and digital wallets? Probably not, but you’ve undoubtedly heard a wide variety of opinions about whether this is good or bad for those in the payments business. My advice: screen out the emotional reactions, focus on the facts, and let’s figure out where we go from here.
Of particular interest to many payment facilitators is how the rule impacts the growing world of digital payments. Digital wallets capable of stored value and also person-to-person payments, such as Alphabet, Inc.’s Google Wallet and PayPal’s Venmo, are covered by the new rule, while wallets such as Apple Pay that only store payment credentials are excluded. Virtual currencies such as Bitcoin are excluded for now, but the bureau indicated it is scrutinizing the potential impact of those on financial services and products.
And it’s important to know this rule does not encompass all prepaid products. It specifically excludes store cards redeemable at a specific merchant, cards given as loyalty or promotions gift cards that are specifically marketed and labeled as a gift card, and several other categories.
But it does target the booming market for general purpose reloadable cards, which CFPB says includes “payroll cards; student financial aid disbursement cards; tax refund cards; and certain federal, state, and local government benefit cards, such as those used to distribute social security benefits and unemployment insurance.”
Regulating a $112B market
The main intent of the rule is to extend to prepaid products the consumer protections and industry requirements of Regulation E, which covers electronic funds transfers. It also ensures that Regulation Z, which implements the Truth in Lending Act, extends to credit features tied in with prepaid products whether offered by the account issuer, its affiliate, or its business partner.
The bureau first indicated it intended to address prepaid products in May 2012. In November 2014 it announced the proposed rule and invited public comments for a 90-day period. The number of unique comments totaled 6,465 (the bureau also noted it had received 56,000 “form comments” resulting from a submission campaign organized by a national advocacy group).
The core requirements involve tailored provisions governing disclosures, periodic statements, limited liability and error resolution, and regulates overdraft credit features that may be offered in conjunction with prepaid. It also adds new requirements for posting account agreements. In essence, this extends to prepaid some of the protections that consumers already enjoy with their debit and credit cards. The rule takes effect October 1, 2017, for the most part.
Certainly issuers may be unnerved over the prospect of extending the $50 limitation on unauthorized transactions to prepaid products—will that lead to more fraud? And having to provide consumers with new disclosure statements may be viewed as putting one more obstacle in the path of a prepaid offer.
Reaction to the changes from the prepaid world has ranged from sedate to hyperbolic. Both Alphabet/Google and PayPal had filed comments arguing that digital wallets should be viewed and regulated as distinct from prepaid cards, but have indicated grudging acceptance of their inclusion in the rule.
Consumer use of mobile technology continues to expand and evolve, faster than retailers have been able to adapt. With the constant threat of losing business to ecommerce hanging over their heads, retailers from the largest national brands to the smallest corner convenience store must adjust to reflect the changing needs and demands of their customers for new mobile payment options. Payment facilitators who have been trailblazing a virtual new frontier beyond the scope of existing regulations will have to adjust to navigation on more defined pathways set out by the CFPB.
No doubt, there will be efforts to moderate or even roll back some of the CFPB’s requirements on prepaid products. That’s the normal push-and-pull of the regulatory environment. But in the meantime we should rejoice that the uncertainty and doubt that has been overhanging prepaid for four years has been settled. Now we can get down to business.
I have a hard time believing that this rule will stymie innovation, which, like water, tends to find its own level. Investment in financial technology (fintech) is growing by leaps and bounds and globally there are an estimated 5,000 to 6,000 fintech startups seeking to modernize and/or disrupt every conceivable segment of the financial transactions industry. Those with a toe in prepaid are likely to view this as a new challenge and opportunity.
Disclosures and limited liability don’t seem to have adversely impacted the issuance and use of credit cards, so let’s figure out how to deal with that and get to it.