In the discussions about prepaid exemptionsin the Durbin Amendment to the Dodd Frank Act, much of theattention around the provisions has focused on the interchange capsand routing restrictions. Little attention has been devoted to someof the other consequences of the amendment, however. One unintendedconsequence is that the Durbin Amendment may lead to the creationof a permanent economic underclass.
It is no mystery that many prepaid cards are designed to helpunbanked and underbanked cardholders gain access to the financialmainstream. Many of these individuals have impaired credit orcheckered histories with banks, and so cannot qualify for astandard account. As a way of helping these customers rebuild theirfinancial lives, many card programs offer bill payment,person-to-person transfer, and savings account features.
With its limitations on the accounts and services that prepaidcards can access and still qualify for exemptions, the FederalReserve has made recovering from previous financial trouble muchmore difficult. If a cardholder’s card is issued by a bank withless than $10 billion in assets, this is less of a concern, howevermany payroll programs are issued by large banks. These cardholdersmay find that they can no longer pay bills, pay or collect moneyfor informal work, or start savings accounts for themselves.
Having an individual savings account attached to a card would turnit into a debit card. Program managers may decide to drop thisfeature rather than risking the loss of exemption from interchangecaps. Losing this ability to save funds means these customers willonly be able to stash cash under a mattress and not be able to usethat account for credit decisions. They will not have funds foremergencies, leading them to seek out expensive credit when theyneed car repairs for example.
Many prepaid card holders could be forced by the provisions of thefinal rules away from the financial mainstream and into a positionwhere the only products available to them are transactionalproducts that provide convenience but lack financial mobility.Without the possibility of building assets and with large portionsof their budgets going to paying for financial services, thesecardholders may end up forming a permanent economic underclass thatexists purely and permanently as a source of fee revenue forfinancial service providers.