New Rule Provides Fraud Protection With Prepaid Cards

Alvin Prasad says someone fraudulently drained his prepaid debit card, leaving him without the means to pay his rent.

“I felt sick to my stomach,” he said. “I’m going to get kicked out. I’m going to need a new place to live.”

Prasad said when he called his prepaid debit card company they told him there was not much they could do to resolve the matter.

“I had no idea what to do; I’ve never been in a situation like this,” he said.

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Prepaid debit cards, used by 23-million Americans per The Pew Charitable Trusts, do not have the same protections as debit cards connected with banks.

But a new rule from the Consumer Protection Offices will “extend a lot of the same coverage that you see with credit cards (and) debit cards,” Matt Schulz of said.

The new rules would force financial institutions to investigate fraudulent claims tied to prepaid cards.

In addition, the money will generally be protected if the card is lost, stolen or wrongly charged.

The new rules do not take effect until April 2018 but Prasad’s prepaid debit card company did return his money.


Making prepaid cards better for everyone

The Senate was set to vote recently on legislation to contravene regulations promulgated by the Consumer Financial Protection Bureau (CFPB) to provide more protections and legitimacy to the prepaid card industry.

Now, the legislation will not come to a full vote after the CFPB announced it would delay the regulations by six months. This six-month delay gives the industry more time to implement the regulations, and the CFPB time to tweak the rules related to digital wallets and limits on liability for unregistered cards. This should satisfy even many of the toughest critics.

In late April I participated in the Payments 2017 Annual Conference in Austin, Texas, and the halls were filled with conversations about new developments in payment technology, making them faster and more secure. Such financial innovation is good for the majority of households but not always for those who are financially vulnerable.

Case in point: Nearly a third of Tennessee’s households are unbanked or underbanked. Many of these families are unable to receive their paychecks quickly by direct deposit and are turning to prepaid cards, a growing category in the payments industry.

For these individuals, cards on the Visa, MasterCard or American Express networks function like a checking account and can be used to set up direct deposits of wages or benefits.

Prepaid card accounts do not require a credit check and most do not allow for overdrafts, making them available even to those who cannot get a bank account.

So, while some of us may buy prepaid cards to control spending for our high school and college-aged children, firms like Walmart, KFC, McDonalds and Home Depot turn to prepaid cards to pay employees, typically lower wage workers.

Today, some prepaid cards come with a catch. Many have fees for everyday uses such as checking an account balance, calling customer service, withdrawing cash at an ATM or with a teller. Some have penalty fees for declined transactions or overdrafts.

While these fees may be reasonable, it is critical for those who rely on these cards to understand these charges. This is especially onerous for workers who are offered no viable option other than using payroll cards provided by their employers.

In addition, many prepaid cards do not have the same federal law protection against fraud, unauthorized charges and errors that bank debit cards have.

To address these issues, the new regulations give prepaid cards the same fraud protections as debit cards. The rules provide a simple, uniform chart of fees and allows people to check their account balances and transaction history for free. Under the new rules, workers must be told of the fees before they accept a payroll card and be reminded they have a choice. The rule caps overdraft fees and requires the fees to be affordable.

The rules will apply not only to physical cards but also to mobile and other prepaid accounts. Whether you access your account with a card or your smartphone, protections from hidden fees and unauthorized charges are important. That’s why the Center for Financial Services Innovation supports the prepaid rule.

These new prepaid regulations will be a welcome change for the one in eight Tennesseans that used prepaid cards in 2015. They will provide the field with needed guidance and further protect Tennessee workers.

Some lawmakers may still worry that the cost of the regulations will push prepaid cards out of reach, punishing those it was designed to protect. But that fear has been widely dismissed by many within the prepaid industry, including the leading provider, Green Dot, whose CEO supports the rules.

Tennessee Senators Bob Corker and Lamar Alexander should understand how these regulations truly protect all Tennesseans who use prepaid cards. I’m thankful our senators were pragmatic and waited for the CFPB to tweak the regulations to address industry concerns—instead of simply pulling the plug on critical consumer protections.


Prepaid card users deserve protection

If your bank debit card or credit card is stolen, federal regulations limit your liability for unauthorized charges.

But if you are one of the tens of millions of Americans who use prepaid debit cards, there’s no such protection in the event of theft or loss. That’s just one example of the disparity between cards. The real shame is that many of the Americans using prepaid debit cards don’t have bank accounts or credit cards.

Many low-wage workers receive their paychecks on electronic debit cards. Some Social Security beneficiaries receive their monthly benefits on a prepaid debit card.

These prepaid cards are a great convenience over carrying large amounts of cash. Loading paychecks or government benefits on a card allows people to get quicker, more secure access to their money. Some folks use prepaid debit cards to avoid getting charged bank overdraft fees.

Unfortunately, some of these prepaid cards haven’t worked as well as they should because some card companies don’t clearly disclose all their fees upfront. Other prepaid debit cards have offered consumers “protection” that turns out to be fees for overdrafts — one of the problems the prepaid cards were expected to prevent.

Complaints about such problems prompted several years of federal review of rules to better protect consumers. Some states, including Montana, have rules protecting workers, including the requirement that Montana workers not be forced to accept payment on a prepaid debit card. Social Security works with just one prepaid card provider, and that one is subject to fee disclosure rules.

But the present rules don’t protect all Americans, and the rules don’t protect prepaid debit card users on par with other electronic card users.

Rules finalized by the Consumer Financial Protection Bureau are scheduled to take effect on Oct. 1. But the wave of anti-regulation fervor in Congress threatens to kill the debit card protection. So far this year, Congress has already used a previously nearly unknown law (the Congressional Review Act) to repeal many environmental regulations. Politicians are targeting the debit card rules partly because they want to eliminate the entire Consumer Financial Protection Bureau, which was created in response to the financial crisis that sparked the Great Recession in 2008.

Consumers Union summarized what the rules would require: fees disclosed upfront; fraud protection; disputes resolved promptly; free and easy access to account information (either with monthly paper statements or a website); and overdraft features such as giving customers at least 21 days to repay their debt before being charged a late fee.

The final rule was released on Oct. 5, 2016. It was immediately endorsed by a major prepaid card company, Green Dot, whose chief executive officer, Steve Streit, said: “We fully support the CFPB’s mission to ensure fairness, integrity and consumer protections for all participants in the financial system. For many years, Green Dot has voluntarily provided full checking account style consumer protections for its customers and has never charged overdraft or penalty fees on prepaid and checking products.”

Although Consumers Union reports that most industry leaders support the rules, one big company doesn’t. NetSpend, which is based in Georgia and Texas, has persuaded U.S. senators and representatives from those states to lead an effort to nix the rules.

If repealed under the CRA, these consumer protections couldn’t be implemented for at least several years — after going through a public rulemaking process again.

Attorneys general from 17 states, including Iowa, Maine, Minnesota and Washington, wrote to congressional leaders last month, urging them to oppose the attempts to scuttle the rules. The attorneys general noted concerns about U.S. college students who received $2.72 billion in financial aid on prepaid debit cards last year.

“The final rule provides common-sense protections to some of the most vulnerable consumers — those who do not have access to bank accounts,” the attorneys general wrote.

We agree.

We call on Congress to protect millions of average Americans and not reject the rules.