I had the pleasure of attending the Consumer Financial Protection Bureau hearing on prepaid cards held in Durham, North Carolina on Wednesday, May 23, 2012. As a participant in the prepaid debit card industry, I braced myself for the worst, but I was pleasantly surprised by the tone and substance of the hearing. It opened with remarks from David Price (D-NC) and Roy Cooper (NC Attorney General) who introduced his good friend, Richard Cordray, the Director of the CFPB.
Cordray opened his remarks by asking the audience to “take a moment and think about what life is like for those who are outside the banking system: What is life like if you do not have a checking account, a debit card, or a credit card?” He then explained that this is the dilemma faced by the more than 9 million unbanked and 21 million underbanked families in the U.S., which together constitutes nearly 60 million individuals according to a study performed by the FDIC.
Cordray further explained that consumers deserve products that are safe with costs and risks that are clearly explained upfront, but this doesn’t always occur because general purpose reloadable cards “have far fewer regulatory protections than bank accounts, debit cards and credit cards.” While I believe that Cordray’s statement overstates the issue since GPR cards are currently issued by highly regulated and licensed financial institutions, in his view, the level of current regulatory protections was troubling because the consumers who use GPR cards are generally the most vulnerable in our society. Cordray also suggested that, due the rapid growth in the GPR card market, clear rules will help “prevent the spread of ‘low road’ competition that hurts both consumers and the honest businesses that seek to serve them well.”
As a result of the reasons described above, Cordray announced the release by the CFPB on the hearing date of an Advanced Notice of Proposed Rulemaking to investigate practices in the prepaid card market focusing on each of the following areas (among others):
1. Consumer protections for lost or stolen GPR cards and unauthorized or fraudulent charges that may appear on GPR card accounts;
2. Availability of FDIC “pass through” insurance for GPR card products;
3. Transparent fee disclosures and standardized fee disclosure practices so that a consumer can compare multiple GPR products using an apples-to-apples comparison; and
4. Availability of overdraft features on GPR products and any consumer protections that may be necessary regarding these overdraft features.
Following Cordray’s prepared remarks, he introduced three separate panels to discuss the prepaid market, which consisted of a Consumer Panel, an Industry Panel and a CFPB Panel. The panelists on the Consumer Panel were Deyanira Del Rio, Associate Director of the Neighborhood Economic Development Advocacy Project (NEDAP), Martin Eakes, the Chief Executive Officer of the Center for Responsible Lending, and Adam Rust, Research Director for Reinvestment Partners. The panelists on the Industry Panel were Dan Henry, CEO of NetSpend, Jeremy Kuiper, Managing Director of the Payment Solutions Group at The Bancorp Bank, and Hyung Choi, Head of US Prepaid Products at Visa, Inc. Finally, the panelists on the CFPB Panel were Cordray, Raj Date, Deputy Director of the CFPB, Marla Blow, Assistant Director for Cards Markets at the CFPB, and Zixta Martinez, Assistant Director for Community Affairs at the CFPB.
Each panelist from the Consumer Panel and the Industry Panel was afforded the opportunity to deliver prepared remarks, which were then followed by questions posed by the CFPB to each panelist. While the Consumer Panelists generally raised many of the same issues discussed by Cordray, they also raised the following additional concerns:
1. They expressed concerns about mandatory arbitration clauses in cardholder agreements;
2. They suggested that GPR products should be more “affordable” in that many services should be free and they provided, as examples, live agent customer service and the issuance of replacement cards for lost/stolen cards. I’m not sure that I understand the logic that value added services with inherent costs should be free simply because, as one panelist continually repeated, “that’s not right”. In my opinion, offering value added features and functionality for free isn’t right either because the products will stop being offered if industry participants are required to provide them at a loss.
3. Despite numerous studies to the contrary, the Consumer Panelists argued that GPR cards are an inferior and more expensive product than bank checking or DDA accounts. In this regard, I would encourage the Consumer Panelists to read various studies that are available in the marketplace including the studies that have been released by Bretton-Woods, Inc. on this very subject.
4. Although GPR products are issued by highly regulated financial institutions, the Consumer Panelists also consistently argued that GPR products are almost completely unregulated.
5. The Consumer Panelists asserted that overdraft products attached to GPR cards should be completely prohibited.
6. The Consumer Panelists asserted that payday loan proceeds should not be permitted to be loaded to GPR cards. This point was driven home by comments from panelists and representatives of local consumer groups in the audience who explained that payday lending has already been prohibited by the legislature in the State of North Carolina.
The one significant inconsistency that arose from the comments of the Consumer Panelists was the suggestion that, on one hand, GPR cards should be subject to the same regulations and protections as checking or DDA accounts, but, on the other hand, several features and functionality that are commonplace with checking and DDA accounts such as overdrafts and the ability to deposit payday loan proceeds into a DDA account should be prohibited for GPR cards.
The Industry Panelists applauded the CFPB’s efforts to better understand the complex GPR card market before blindly proposing new rules and regulations affecting the prepaid industry. In addition, the Industry Panelists seemed to agree with many of the suggestions posed in the ANPR including:
1. Extension of Reg. E light to GPR cards in the same manner applied to payroll cards with the exception of the need to handle provisional credits in a different fashion than payroll cards because of inherent differences in the products;
2. Extension of FDIC “pass through” insurance to GPR card accounts; and
3. Affording many of the same protections to GPR card accounts that are provided to holders of DDA accounts.
On many of these fronts, it appeared that the CFPB, the Consumer Panelists and the Industry Panelists were actually in violent agreement.
Following the panel discussions, the CFPB then opened the floor to consumers in the audience who wanted to describe their experiences with GPR cards. The comments from the floor generally landed in one of two buckets: consumers who were extremely happy with the GPR card products that they were using because they solved a specific need (i.e., inability to access mainstream financial services; or use of the product as a budgeting tool); representatives of various consumers groups who reiterated many of the same concerns that were raised earlier in the Hearing.
One of the most interesting contradictions that came out of the panelist comments and the comments from the floor was that consumer groups viewed GPR cards as a second tier product that are utilized by consumers primarily as a training, “ramp up” or “step up” product to traditional mainstream banking products. While this may be true for many unbanked individuals, several comments from the floor indicated that using a GPR product was a independent choice that is made every day by banked individuals. In fact, one the consumers who spoke during the hearing was “offended” that all GPR card users were being described by consumer groups as unbanked or underbanked, uneducated and in need of the government’s help because they don’t understand the fee structures applicable to GPR cards. This consumer explained that she was a college educated nurse, had a bank account, had a six-figure salary and that she chose to use a GPR card rather than a checking account for many of her financial service needs. She also explained that, not only did she clearly understand the fee structure, but she has purchased GPR cards for all three of her children to help teach them how to budget their money.
I believe that a key takeaway for the CFPB from the public comment portion of the hearing was that not all consumers are forced to use a GPR card product because of a lack of alternatives, and some consumers with access to bank accounts and other mainstream financial products actually make an affirmative choice to use a GPR card over a DDA account because of many of the beneficial features and functionality that are offered with a GPR card and the fact that the product is often cheaper than a low balance checking account.
In addition to copies of white papers and other documents written by the panelists that were made available outside the Hearing room, there were also copies of letters to Cordray in strong support of the continued availability of GPR card products which were written by Congressman McHenry (R-NC), Congressman Schuler (D-NC), Congressman Meeks (D-NY), and Congressman Hastings (D-FL).
While this hearing was only the first step by the CFPB in determining whether and how to regulate GPR cards, I left the hearing feeling hopeful and optimistic that the CFPB is truly interested in fully understanding how consumers use these valuable financial services products, and that the CFPB will take care to adopt reasonable, common sense regulations that will be beneficial to all stakeholders but will not stifle innovation in the prepaid card industry.
Brad Fauss is a payments industry veteran with more than 11 years of electronic transaction processing experience, including leadership positions at Global Payments and TSYS Prepaid (among others). Prior to working as in house counsel, Fauss worked with the law firm Parker Poe Adams & Bernstein LLP in Raleigh, NC and with the law firm Alston & Bird LLP in Atlanta, GA. Fauss serves on both the Board of Directors and the Executive Committee for the Network Branded Prepaid Card Association (NBPCA). He is a frequent speaker on legal, regulatory and compliance issues affecting the debit, credit and prepaid card industries.
Fauss is also a summa cum laude graduate of Florida State University with a Bachelor of Science in finance, and he graduated with honors from the University of North Carolina at Chapel Hill School of Law.