In the fall of 2016 the Consumer Financial Protection Bureau (CFPB) issued final rules on prepaid debit cards, now set to go into effect April 1st of 2018. As is the case with most CFPB rule makings, the rule on prepaid debit cards will actually harm the same consumers it was originally designed to “protect.” Over 23 million Americans use and rely on prepaid cards, yet if the CFPB’s rule goes into effect, those same consumers will be pushed out of the market, depriving them of access to basic banking services.
Since enactment of the Dodd-Frank Act, and resulting myriad of regulations, many banks have found it no longer advantageous or feasible to offer free checking accounts, and have alternatively increased fees and required higher minimum balances in order to maintain free checking accounts. This in turn pushed many financial consumers, which tend to be low-income, out of the traditional banking system.
Many of the consumers that lost their free checking accounts or were no longer able to afford them turned to alterative financial products, such as prepaid debit cards, which serve a similar function as traditional bank accounts. Prepaid cardholders can have their paychecks directly deposited onto the cards in much the same manner as standard debit card and checking account arrangements.
In recent years prepaid cards have grown in popularity because they are often cheaper than traditional account linked debit cards, which is why they are often preferred by low-income users. In fact, the amounts placed on prepaid cards have grown from $1 billion in 2003 to a projected $112 billion for 2018.
According to a 2014 report from The Pew Charitable Trusts, of an estimated 23 million consumers using prepaid cards, a quarter of those were low-income Americans, with a third having annual income below $15,000. Obviously these numbers reflect that if the CFPB prepaid card rule moves forward, low-income Americans will bear the brunt of the impact. This will likely increase the amount of “unbanked” Americans, which already number in the millions.
Additionally, as pointed out in a recent piece from the American Action Forum (AAF), according to the CFPB’s own estimates the prepaid rules will result in 137,642 one-time burden hours for prepaid card companies forced to comply, and another 19,494 ongoing burden hours.
AAF estimates that the rules will costs prepaid card companies $5,257,935 just to get into compliance with the rule, in addition to another $744,697 annually just to maintain compliance. Such costs will inevitably be passed onto consumers, depriving even more of needed banking services.
Thankfully, this year the House and Senate introduced joint resolutions of disapproval of the CFPB’s prepaid card rule pursuant to the Congressional Review Act. H.J. Res. 73 was introduced in the House by Representative Roger Williams (R-Texas) and S.J. Res. 19 was similarly introduced in the Senate by Senator David Perdue (R-Ga.).
Lawmakers on Capitol Hill should support these common sense measures that will protect American consumers, especially those of limited means, that rely on and prefer prepaid debit cards. This will not only increase choice for consumers but will ensure that those who have been pushed away from traditional banking products and services will have access to alternative financial services such as prepaid cards.
Photo credit: Paul Istoan