7 Essentials

For Safe Prepaid Cards

Lauren Saunders

National Consumer Law Center

FDIC Committee on Economic Inclusion

December 1, 2011
What is a “Prepaid Card”?

• Prepaid v. bank account line blurring

– Banks offering prepaid cards, but not a– Checks, billpay on prepaid and checkl

checking

– Prepaid accounts that are individual b

accounts

– Prepaid cards with savings accounts– Prepaid card fees migrating to bank ac

• Prepaid currently works best with direct d
Federal Laws on Some Prepaid Car

• FDIC general counsel opinion (FDIC insuranc• Electronic Funds Transfer Act (EFTA) and Re• Truth in Savings Act (TISA)• Durbin Amendment interchange fee rules• Treasury rule on deposit of federal payments • FTC Act, Consumer Financial Protection Act 

deceptive or abusive practices)

• U.S. Department of Labor guidance on state 

unemployment prepaid cards

=> No comprehensive federal law on prepaid
7 Essentials for Safe Prepaid Cards

1. Choice (for government, employer ca

2. Clear, conspicuous disclosures

3. Security of funds (FDIC insurance, 

bankruptcy)

4. Protection from errors, unauthorized 

transfers

5. Ample free access to account inform

account inform

(customer service, statements, balanc

6. No unfair, unreasonable fees7. No embedded credit features
1. Choice: Consumer Should Choo

Whether to Have a Prepaid Card

• States, employers must offer choice of d

deposit first, cannot require prepaid acco

• Some states using prepaid cards exclusi

unemployment benefits. Violates EFTA.
2. Disclosures

• Consumers should get clear, conspicuous 

information on fees, key terms, before purch

• Little law beyond TISA/EFTA/UDAP rule tha

must be disclosed.

• CFPB should require a Schumer box on out

package, “must-see” location on website.

• Need a single “APR”-like number so can co

cards? How to calculate?
3. Security of Funds if Bank, Other 

is Insolvent

• Need FDIC or NCUISF insurance payable to 

consumer on “pass-through” basis.

• FDIC general counsel: Prepaid cards eligible 

structured right. Not all comply.

• New Treasury rule: must comply if receive fe

direct deposits (SS, SSI, tax refunds, etc.) 

• Compliance also makes funds custodial, pro

nonbank program manager insolvency.

• AmEx prepaid card: not a bank so no FDIC i
4. Protection from errors/unauthorized 

• If an “account” under EFTA:

– Liability caps if loss/theft/unauth’d charges– Procedures to resolve billing errors– Stop payment rights (recurring payments o– No merchant dispute protection (like credit 

• EFTA covers only payroll, some gov’t ca• New Treasury rule: private cards must follow 

card rules if accept federal direct deposits

=> Reg E needs to be extended to all cards.
5. Ample Free Access to Account In

Prepaid Cards May Have:• No paper statement option, even if no internet 

dispute time may run w/o seeing charge. 

• Fees for customer service (live or IVR calls to 

balance).

• Fees for using teller, ATM balance inquiries. N

and-mortar human contact (even for bank prebranches may not handle).

Bank accounts are moving in this directionNeed incentives to offer options consumer
6. No Unfair, Unreasonable Fees

Forbid or strictly limit to costs:• Fees that impede access to information ne

manage the account

• Penalty fees (no incentives to encourage m

• Fees that impede exercise of legal rights

Other fees:• As few as possible (create incentives to m• Choice of single monthly fee & pay-as-you• No tricks/traps; card should work, cost, the 

consumers expect
Fees: Interchange/Durbin Rules

Prepaid & gov’t benefit cards exempt from 

interchange fee cap if card:

• Issued by bank under $10 billion, OR• Issued by larger bank and:

– 1 free ATM withdrawal/month.– No overdraft or shortage fees, and–

No bill pay, ACH, check features.

=> Makes prepaid less useful or driv

prepaid to smaller banks w/ no limfees.
7. No Embedded Credit Featur

Overdraft fees, problems with credit kee

out of bank accounts. Prepaid cards shave:

• No overdraft fees. Prepaid should be 

• No credit tied to mandatory automatic 

repayment.

– No creditor should take cut of income 

food, rent, medicine

– Leads to lazy underwriting– Consumer can choose to set up autom

repayment or link to separate credit ac
Legal Limits on Overdraft Fees, Cre

• Durbin amendment• EFTA:“No person” can condition credit on 

repayment by “preauthorized electronic fund transfer” (doesn’t apply to single payments)

• If covered by Reg E, must opt-in to overdraf

ATM, single debit transactions

• Treasury: no federal direct deposits to card 

– Line of credit or “loan agreement” triggering 

automatic repayment upon deposit.

• May apply to overdraft fees.
Payday Loans on Prepaid Cards

• OTS shut down iAdvance on MetaBan

Netspend cards ($2.50 per $ 20) as unor deceptive. Chilled the market for a period.

• July 2011: OCC proposed guidance o

“account advance” (bank payday) prodCould legitimize bank payday, which is spreading and could return to prepaid 

• Prepaid cards can be sold by payday 

lenders to avoid state laws.
After AZ 36% rate 

cap in effect, CheckSmart(Arizona Payday Lender) Selling Urban Trust Bank (VA) Insight Prepaid Card“Courtesy transfer” about $14/$100“Overdraft”$15/$100
For more information

• NCLC website (Issues/Banking and Pay

Systems/Prepaid Debit Cards)

• NCLC Consumer Banking & Payments M