The government's top consumer sheriff wants to rein in the Wild West of prepaid cards, even as some of the biggest players in the financial industry move quickly into the new frontier.
On Wednesday, the Consumer Financial Protection Bureau is taking the first step to create consumer protections for prepaid cards and extending the same regulations that protect consumer checking accounts.
"Right now prepaid cards have far fewer regulatory protections than bank accounts or debit or credit cards," Richard Cordray, the director of the CFPB, said in a prepared statement. "That's why we are [making rules] to promote safety and transparency in this emerging market."
In addition to a field hearing in Durham, N.C., Wednesday, the bureau is taking public comments on the topic until July 22.
Prepaid cards is one of the fastest growing areas of consumer finance, but the cards are subject to few regulations. Consumer advocates have sharply criticized the industry for inconsistent fee disclosures and the lack of standard protections around stolen or lost cards.
Last year, consumers put more than $57 billion onto reloadable cards, a big jump from $19.5 billion in 2008, according to estimates by the Mercator Advisory Group, a market research firm. The figure is estimated to be more than $160 billion by 2014.
As part of its new rules, the CFPB will review fees and terms of disclosure, the way lost or stolen funds are handled, and features including credit-like small loans or advances available on some cards. The bureau also launched a consumer website to answer questions about the cards.
Over the last few years, prepaid cards have been marketed as an alternative to checking accounts for those who cannot or don't want to get a traditional bank account. Like a checking account debit card, consumers using reloadable prepaid cards can receive direct deposits, make electronic payments or ATM withdrawals with a PIN number. But all those services come with fees.
"You have people who have been pushed out of banks, and they look around and do the math; even when [they] have to pay a small fee" it makes sense to use one, said Ben Jackson, an analyst who studies the prepaid industry with the Mercator Advisory Group.
Changes in the eligibility rules for credit cards have boosted the popularity of prepaid cards. The CARD Act, which took effect in 2010, set an age limit of 21 for credit cardholders, unless the cardholder is self-supporting or has a cosigner. Younger consumers wanting to shop online are also turning to prepaid cards, according to an April report from Javelin Strategy & Research, a market research group.
Established financial institutions' involvement in the prepaid market is adding more legitimacy to cards, once viewed as products only for the poorest consumers.
American Express has been rolling out a variety of prepaid cards and programs this year to broaden its customer base and market the cards for specific uses, such as earning rewards points for online games.
Earlier this month, JP Morgan Chase also announced the national launch of the Chase Liquid prepaid card this summer as a way to provide a cheaper alternative to its checking accounts.