Making Prepaid Safe for Consumers: A Framework for Providing Deposit Insurance and Regulation E Protections

Abstract

General purpose reloadable prepaid cards are part of a larger trend toward a cashless society. This market offers significant benefits to both traditional depository institutions and new non-bank entrants in the payments industry. Electronic transfers significantly reduce the costs associated with paper-based payment systems. To balance the benefits received by payment providers, consumer protections must be established to prevent consumers from becoming the sole bearers of the risks inherent in any payment system. Simple protections, those traditionally afforded to mainstream banking clients using checking accounts and debit cards, must be adopted for the GPR prepaid product to ensure long-term product safety for consumers. GPR prepaid cards are a new product, so deposit insurance should simply be extended to maintain the historical principles underlying deposit insurance. Likewise, the extension of Regulation E protections to GPR prepaid cards would simply complete work initiated by the Federal Reserve eighteen years ago. Both the EFTA and Dodd-Frank give the CFPB the authority to extend these consumer protections. Part I of this paper will provide a brief overview of the prepaid card industry and consumer use of the GPR prepaid product. In Part II, the paper outlines the gaps in the regulatory scheme for prepaid cards and highlights the initial steps federal regulators have taken to close the gaps. Part III outlines reasons for extending consumer protections to GPR prepaid cards by illustrating that consumers are unable to protect against risks inherent in GPR prepaid card programs. Finally, Part IV outlines the existing statutory provisions giving the CFPB broad authority to regulate GPR prepaid cards and includes an analysis of recent proposed legislation that would provide additional support to the CFPB’s work to ensure the safety and transparency of the general purpose reloadable card for consumers. This section highlights the CFPB’s broad power under Dodd-Frank to regulate consumer financial products to insure the consistent application of federal consumer protection laws. Ultimately, consumer safety and transparency goals will be supported by the CFPB’s comprehensive regulation of GPR prepaid cards.

Keywords: prepaid, payments