US regulators are clamping down on the estimated $100bn market for prepaid cards, in a move welcomed by consumer champions but attacked by the industry for limiting access to funds for low-income households.
The proposals from the Consumer Financial Protection Bureau mark Washington’s first big push to regulate one of the fastest-growing corners of finance.
An estimated one in 11 Americans use prepaid cards, which can help consumers struggling to open a regular bank account to make purchases and manage money.
The industry has rushed to fill a gap left by banks, which have dropped riskier customers in the face of higher regulatory requirements imposed after the financial crisis. It is estimated that about $112bn will be loaded on to the cards in 2018 — nearly double 2012 levels, according to the CFPB.
The new rules will give prepaid account customers similar protections to those enjoyed by current account and credit card holders. They will require providers to limit losses to $50 when funds are stolen or cards are lost, investigate and resolve mistakes and give consumers free access to account information.
Consumer rights advocates have long complained about practices in the industry, including high and unexpected fees and a lack of legal protections.
Concerns about the cards came to the fore last year when holders of RushCard, a business founded by the hip-hop impresario Russell Simmons, were unable to access their money because of technical problems.
The crackdown is the latest sign that the CFPB is flexing its muscles. The agency last month slapped a $100m fine on Wells Fargo — the largest in its five-year history — after the bank’s employees opened as many as 2m accounts without customers’ permission.
Backers of the agency said it had landed a big scalp with the move against Wells, although critics complained it had been slow to act. The CFPB, set up to protect consumers after the last financial crisis, has also been taking action in areas from payday lending to credit scores.
The latest regulations cover traditional prepaid cards as well as mobile wallets, so-called person-to-person payment products and other types of accounts including payroll cards.
They require operators to provide information about fees and account terms, establish that customers allowed to borrow using the cards are able to repay the debts, and cap interest charges.
Richard Cordray, CFPB director, said: “This rule closes loopholes and protects prepaid consumers.”
The industry argued that the plans would hit the so-called unbanked or underbanked.
Now consumers will be able to compare cards more easily to find the most affordable option and have the peace of mind that their money will be safe if their card is lost or stolen
– Christina Tetreault, Consumers Union
“The CFPB has dismissed many of our serious concerns and moved forward with a rule that will harm the very consumers it aims to protect,” said Brad Fauss, head of the Network Branded Prepaid Card Association.
He added that the proposals “will ultimately limit access to an essential mainstream consumer product that helps millions of Americans participate in the digital economy, affordably manage funds, and safely hold money.”
However, Christina Tetreault, staff attorney for Consumers Union, said: “Consumers have lacked the legal safeguards they deserve to protect their money.
“Now consumers will be able to compare cards more easily to find the most affordable option and have the peace of mind that their money will be safe if their card is lost or stolen.”
The CFPB said the new rules applied “specific federal consumer protections to broad swaths of the prepaid market for the first time”.