The Durbin Amendment to the Dodd-Frank Wall Street Reform Act could hurt the ability of prepaid cards to help underbanked people, according to an article by Melissa Koide, the policy director of the Center for Financial Services Innovation.
But the Fed’s final interchange rule, while likely intended to curtail large banks from engaging in regulatory arbitrage using the prepaid card carve out, will likely have far-reaching consequences, particularly for underbanked consumers.
The final rules limit the options for the poor and could hurt the industry in the long term, Koide writes.
Although the rule won’t affect most prepaid cards in the marketplace today because these cards are largely issued by small banks, the exemption unnecessarily deepens the divide between where lower-income consumers and middle- and upper-income consumers get their financial products and services. Under the new rule, consumers will either get highly functional cards issued by small banks or basic transaction cards issued by big banks.
She said that the rules will lead to less innovation in the industry, higher prices, and fewer options. Mercator agrees with Koide’s assessment, though we think that the Durbin amendment is only one piece of a larger puzzle. Recent actions by the Office of Thrift Supervision, the Financial Crimes Enforcement Network, and the Office of the Comptroller of the Currency make running a program that can be more than a simple transaction tool increasingly difficult.
Providers have their work cut out for them in trying to build a complete program that will help low and moderate income people avoid costly service fees from alternative financial advisors, and build a financial life that moves them beyond living from paycheck to paycheck.
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