Regulators expand protections to prepaid debit card users

NEW YORK -- Federal regulators announced new rules Wednesday governing the quickly growing prepaid debit-card industry, an effort more than two years in the making that should bring basic account protections to its customers, who are often financially disadvantaged.

Prepaid debit-card issuers will have to provide their users with basic account information such as balances and transaction history free of charge to customers.

Protections for lost or stolen cards also will be expanded to prepaid debit cards.

Fees for the cards will have to be disclosed more clearly on the packaging.

"Before today ... many of these products lacked strong consumer protections under federal law," Richard Cordray, director of the Consumer Financial Protection Bureau, said in a statement. "Our new rule closes loopholes and protects prepaid consumers when they swipe their card, shop online or scan their smartphone."

Once a product whose only purpose was to function as a gift card, prepaid debit cards have become increasingly popular over the last 15 years and have effectively replaced a traditional checking account for millions of Americans.

Roughly $65 billion was loaded onto prepaid cards in 2012, the most recent year for which data are available.

That's more than double the amount loaded in 2009, only three years before.

The amount loaded is expected to double again by 2018.

Sold in most grocery or convenience stores, the cards largely are used by lower-income Americans, who are statistically more likely to be young, a racial minority and earning less than $25,000 a year, according to the Pew Charitable Trusts.

As the industry has grown, it has had more than its fair share of controversy. Early prepaid cards carried extremely high monthly fees, even sometimes fees to load money onto a card.

The RushCard, a card backed by hip-hop mogul Russell Simmons, suffered a massive technical glitch a year ago that locked more than 100,000 customers out of their funds, sometimes for weeks.

The industry's missteps have allowed more traditional banks and financial services companies to come out with their own prepaid cards, including JPMorgan Chase and American Express.

The industry won one significant concession.

The CFPB will allow prepaid debit-card issuers to provide overdraft services, which would legitimize a small, controversial part of the prepaid debit-card industry.

Only 2 percent of all prepaid debit cards allow their customers to overdraft, according to the National Consumer Law Center.

With the CFPB's blessing, that percentage likely will expand.

Consumer advocates had been pushing hard to ban overdraft in prepaid cards, arguing many prepaid customers used the card specifically to avoid being exposed to overdraft.

But by making overdraft available, it makes prepaid debit cards nearly synonymous in their features as traditional checking accounts.

The new rules go into effect Oct, 1, 2017.

"Research shows many consumers turn to prepaid cards to control spending and to avoid overdraft fees. Moving forward, we strongly encourage the bureau to rein in these harmful fees for checking accounts, the most widely used financial product in the U.S.," said Nick Bourke, director of consumer finance at Pew Charitable Trusts.