Pending rule spreads prepaid compliance “wealth”

The prepaid credit market faces significant changes when issuers implement a rule finalized by the Consumer Financial Protection Bureau in October 2016, a new study from Javelin indicates. Those challenges come amid other developments identified by the research, including some surprises regarding the makeup of the prepaid market.

The original effective date for most provisions of the rule was Oct. 1, 2017, though on March 9 CFPB published for comment a proposal to postpone implementation for six months, beginning April 1, 2018. (There is also a proposal pending in Congress to kill the regulations, using authority under the Congressional Review Act. No significant action has been taken on that yet.)

The rule essentially mandates that prepaid card customers receive the same consumer protection as credit card and checking account customers.

Those protections include loss limitations, problem resolution, and free information access. Further, if issuers offer credit functionality, they must provide credit card-like services such as statements and grace periods. They must also require card holders under 21 years of age to provide proof of their ability to repay.

As these consumer protections are implemented, the prepaid business model will see significantly higher operating costs and less revenue because of the elimination or limitation of certain fees, according to a March 2017 report by Javelin Advisory Services.

Definition of prepaid includes accounts with no card

CFPB defines a prepaid card as “a card that you use to access money that is loaded onto the card in advance.”

Significantly, the bureau includes online and mobile accounts under its prepaid definition even though the issuers of those accounts often do not give customers a physical card. There are different types of prepaid cards, but most cards permit customers to spend the money on the card for daily expenses or withdraw cash from an ATM. Some customers also choose to have their income directly deposited on a card.

The new rule also broadens the definition of prepaid to include additional companies and products. Mobile wallets (e.g., Starbucks), P2P payment products (e.g., Venmo), and other electronic prepaid accounts that can store funds will now fall under those regulations. The rule also covers payroll cards, tax refund cards (e.g., H&R Block), student financial aid disbursement cards, and certain federal, state, and local government benefit cards used to distribute funds such as unemployment insurance and child support.

Possible impacts reviewed

As market participants weigh the increased costs and potential limits on revenue, some may decide to exit the market or at least reduce their exposure as evidenced by the January 2017 announcement by Green Dot that it was purchasing RushCard, a small prepaid player, says Michael Moeser, director of payments, Javelin Strategy & Research.

According to the Javelin survey, Navigating Prepaid Card Waters: Finding Opportunities In A Sea Of Challenges, the new rules provide greater definition in how prepaid cards are marketed and managed to the benefit of the consumer in the areas of prepaid protections, prepaid disclosures and credit protections.

“Consumer protections will make consumers more comfortable using prepaid cards, but on the flip side, issuers may find compliance more cumbersome and decide it’s not what they want to do. The industry might become more consolidated,” Moeser suggests.

He expects the biggest impacts to fall on issuers with marginal prepaid business. Banks that serve the prepaid market may partner with a large player such as Green Dot or offer limited checking accounts to prepaid customers who were previously unbanked.

Beyond the “usual suspects”

Moeser says, however, that it would be a mistake to view prepaid card users as people of limited means. Or people who are young. Or old. Or renters. Or not tech savvy. The prepaid market has grown exponentially in recent years and its customer makeup is one of the surprise results of the Javelin survey.

“It was very interesting to find that prepaid credit cards resonate through multiple income groups,” Moeser says, noting that prepaid products are used by lower-income consumers who have few other options, as well as by people in higher income groups who use them as budgeting tools. He likened the use of prepaid cards to “putting cash in an envelope to be used for eating out or for electronics purchases. No matter how much you make, it’s a great way to get that spend.”

Another surprise finding is that home owners use prepaid products.

“The expectation is that once you own a home, your credit score increases and you become more credit worthy and no longer need prepaid cards, but we found that people use prepaid products to control spending,” says Moeser.

Industry challenges

Over the past decade some industry participants experienced good payment volume growth despite competitive pressure and regulatory scrutiny, while others found profitability to be elusive. The Javelin study indicates that digital wallets and P2P payments pose a significant long-term threat to prepaid cards because of their explosive growth and the fact that prepaid card owners have a propensity to be mobile banking customers as well.

The report notes that the use of mobile wallets and P2P services among prepaid cardholders exceeds their use of prepaid cards for all age groups. Because prepaid cards have a lifespan of only six months, product longevity remains the biggest challenge to the industry.

Other findings from research

• Gender gap. Men younger than 45 have significantly higher levels of prepaid card ownership than women, peaking at 38% (men) vs. 24% (women) for consumers ages 25–34.

• Everyone likes them. Four distinct peaks across low to high incomes of prepaid card owners demonstrate that the card’s value resonates equally for all consumers.

The first peak starts with the less-than-$15,000-in-annual income group at 22%, followed by middle-income consumers ($75,000–$99,999) at 25%, and then two additional peaks at $150,000–$199,999 (25%) and the $250,000+ segments at 23% and 26%.

• Demographic trends evident. Among some interesting similarities and differences among groups, the study found:

• Prepaid card ownership levels are very high for all underbanked consumers, regardless of ethnicity.

• Hispanics and African-Americans own more stored-value cards (prepaid and gift cards) and debit cards than consumers of other ethnicities.

• More than four in 10 (42%) older millennials (age 25–34) who own a prepaid card have used an online credit service in the past 90 days.

• Men (62%) and women (55%) agree that their top reason to use a prepaid card is to control spending.