According to the Federal Deposit Insurance Corporation, just under 20 percent of American households are “underbanked” – which means they either don’t have a bank account or have one but use other services like check cashers more regularly. One of the services used most often by underbanked households is the prepaid debit card, which in many ways acts like a portable bank account (see here for how Mastercard’s version works). Yet this service is about to be subject to a regulation from the Consumer Financial Protection Bureau that will cause many of the features underbanked people rely on to be dropped. Congress can, however, disapprove of this rule. It should do so.
Prepaid cards are more likely to be used by people who are black, young, unemployed, disabled, or very low income (under $15,000 a year). Surveys have found that they are popular because they allow people to control their finances, avoid overspending, and avoid bank fees. In an age where banks are much less responsive to customer needs, the ability to control your finances directly—to the extent of having them in your pocket—is important to many.
Unfortunately, the Consumer Financial Protection Bureau decided that consumers did not know enough about some of the features of their cards, a problem that apparently required promoting a 1,700 page rule regulating these features and their disclosures. As can be expected with a 1,700 page rule, the effects will be significant enough to disrupt the prepaid card market.
For a start, costs will rise. The industry estimates that compliance costs will be as much as $1.5 billion. Those costs will be passed on to prepaid consumers in the shape of increased fees—exactly what the consumers were trying to avoid in their choice to use prepaid cards.
Second, some features will disappear. For instance, the rule requires disclosure of the highest fee payable for bill payment features. Many cards offer free bill payment, but charge for emergency bill payment. The disclosure rules will require that the charge for emergency bill payment be made visible, which will likely deter consumers from using the feature, even for non-emergency payments. It is therefore likely that card issuers will simply stop offering the emergency bill payment feature, or even bill payment features at all.
Third, while many customers use their cards to avoid overdrafts and would prefer to have transactions declined rather than pay a service fee for an overdrawn prepaid card, about 30 percent of users are happy with paying the fee. Indeed, many consumers want to make sure that all their small transactions are covered to keep their household running. The rule effectively outlaws such overdraft facilities on prepaid cards by redefining overdrafts as “credit,” to be regulated separately, which is incompatible with how the Truth in Lending Act has been interpreted over the past 40 years. Of course, the underbanked are much less likely to have access to credit at all, meaning that yet another source of emergency funding for them is to be regulated out of existence—all for their own good, of course.
Finally, the way the CFPB enforces its expansive regulations will likely lead to a decrease in innovation in this market and others. Digital wallets are covered by the rule, which means that popular apps like Venmo and Google Wallet will be subject to rules that make no sense for them, such as defined font sizes on disclosures. As such apps are not aimed at the same market demographic as prepaid cards are, it makes little sense for them to be included, but the CFPB’s keen litigators will be happy to come after them.
Thankfully, two motions of disapproval of the rule have been introduced in Congress – H.J. Res. 73 and S.J. Res. 19. CEI, together with a host of allied organizations, has submitted a coalition letter to House lawmakers supporting the House resolution and hopes to see it passed. As we argue:
“Thousands of consumers and dozens of Members of Congress on both sides of the political aisle have repeatedly urged the CFPB to alter course so as to not hamper underserved consumers access to important financial products and features. However, the CFPB ignored this advice and has continued its aggressive approach to overregulation and will ultimately harm the vulnerable Americans it was supposed to help.”
If Congress fails to act, millions of Americans will find their access to financial services further constrained. Congress needs to pass a resolution of disapproval and send it to the President’s desk.
Iain Murray is the Competitive Enterprise Institute's vice president of strategy. For the past decade with the Institute, he has concentrated on financial regulation, employment and immigration regulation and free market environmentalism.