I find it interesting that the Bureau of Consumer Financial Protection (BCFP) which was formerly known the Consumer Financial Protection Bureau (CFPB) is offering up a “Disclosure Sandbox” to assist in developing disclosures that consumers find understandable. Yet, on April 1, 2019, the prepaid industry will be required to disclose fees using a specific format and methodology; similar to the Schumer Box for credit cards.
- Prepaid card companies facing new disclosure requirements in April may look to take advantage of a disclosure testing policy at the same agency
- A “trial disclosures sandbox” might let companies move away from paper-based fine-print or try out formats better suited to mobile apps
Prepaid account disclosure rules set to go into effect next year have the industry eyeing a new CFPB program that could give companies more leeway over the disclosures.
The prepaid industry has blossomed from gift and payroll cards to rechargeable debit-like products from Netspend Holdings, Inc. to hybrid mobile wallet-plastic card products like PayPal, Inc.’s Venmo card. Despite the industry’s move toward more mobile and electronic capabilities, it now faces new paper disclosure requirements for fees and other product details from the Consumer Financial Protection Bureau.
The new disclosure requirement are very specific. Not only as it relates to what is required to be disclosed, but how it should be formatted what fees need to be prominent, down to the size of the text font. The regulation requires that not only one disclosure is required in the specified format, but an additional disclosure on all of the possible fees again in a specific format and how it is possible to avoid the fee if used in a certain way.
“We want to encourage electronic requirements because that’s where consumers are,” Brian Tate, president and CEO of the National Branded Prepaid Card Association (NBPCA), told Bloomberg Law.
The paper disclosure requirements that take effect in April 2019 are “one of those areas where the Bureau is regulating where things were five years ago, and not five years into the future,” Tate said.
Soon, prepaid cards could benefit from a separate CFPB program that would allow companies to experiment with new product disclosures to consumers.
The bureau is working to finalize a proposed “trial disclosures sandbox” program that would allow companies to test alternatives to prescribed methods or industry standards. The idea is to allow companies a two-year trial period to experiment with “plain English” product and fee disclosures, alternate formats or delivery methods without fear of CFPB enforcement.
“There hasn’t been a lot of progress yet in harnessing technology to make disclosures more accessible, more meaningful, more usable,” John Kromer, at attorney at Buckley Sandler LLP in Washington, told Bloomberg Law.
“In many respects you have an accumulation of additional requirements that arose out of Dodd-Frank but insufficient effort to utilize the tools new technologies offer to improve the consumer experience,” Kromer said.
The juxtaposition of the bureau’s additional compliance requirements on the one hand with a regulatory framework for experimentation around the same requirements on the other highlights the need for better disclosure methods, Scott Talbott, senior vice president of government affairs at the Electronic Transactions Association, told Bloomberg Law.
“One of the challenges, historically, with disclosures is you have to balance the need for legal requirements and disclosures to inform consumers with the real-world reality that most consumers don’t read it cover to cover,” said Talbott, whose trade group represents major financial services companies and fintech startups.
The prepaid rules would require some products to include disclosures on the card itself or attached to it by paper. There, “disclosures become lengthy, and given space requirements, sometimes the print is small,” he said.
Shifting disclosures to a mobile format “while still challenging, is going to be easier,” Talbott said. Prepaid companies who change their fee structures would be able to easily make the update online, rather than recalling thousands of cards already in use, he said.
Netspend, one of the top U.S. reloadable prepaid card companies by gross dollar volume, said it’s tracking the progress of the trial disclosures program as the CFPB works to finalize it. “We are encouraged by the Bureau’s proposal to innovate the trial disclosure program in a way that benefits consumers,” a Netspend spokesman told Bloomberg Law said by email.
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Traditional prepaid card companies may already have their eye on the sandbox. The program “will be essential for providers of prepaid accounts, as they otherwise may not have a means of testing new and modified disclosures and disclosure processes without violating the provisions of the Rule,” the NBPCA said in a Oct. 3 comment letter.
The prepaid card rules will impose a “prescriptive disclosure regime not shared by other, similar products,” said the trade group, whose members include large banks like Citi, BB&T, GreenDot, Corp., the largest U.S. prepaid debit card issuer, and card processing networks like Discover and Mastercard.
The new requirements won’t necessarily make things easier for consumers and won’t “allow providers to modify the disclosure based on trends or other emerging factors,” the NBPCA said.
Some of those trends include growing use of prepaid cards among millennials, projected to soon be the largest U.S. population group, according to a study from FIS, a financial services consulting and technology company. Millennials are also the most likely to use mobile banking apps, according to the same study.
The prepaid market itself is growing. In 2017, more than $323 billion were loaded onto “open-loop” prepaid cards, which can generally be used anywhere, according to data from the Mercator Advisory Group. Mercator projects about 10 percent compound annual growth rate for the industry to reach more than $427.8 billion by 2021.
But the typical uncertainties that haunt sandbox efforts still hang over what the CFPB is attempting to do. Among them are the possibility of state enforcement action for sandbox participants, as well as the fear the what merits a pass from the CFPB in one administration could change under a future one.
“I have mixed feelings about the sandbox,” C. Sue Brown, director of Mercator’s Prepaid Advisory Service, told Bloomberg Law. The structure could create opportunities for industry players to improve products, but the potential for future enforcement is still significant enough to make companies cautious, she said.
“I don’t know how many players are going to go there and take that chance,” she said.
In the end the BCFP is giving mixed signals to the prepaid industry. On one hand, it is requiring strict compliance with the new disclosures, while at the same time providing players with the opportunity to test disclosures that do not/may not meet the requirements of the regulation. Unfortunately, the BCFP is in flux. For the past two years, the BCPF has been reducing the fines associated with Unfair, Deceptive, or Abusive Acts or Practices (UDAPP). With that said, when the house of representatives changes control – will this all reverse? Time will tell.
Overview by Sue Brown, Director, Prepaid Advisory Service at Mercator Advisory Group
