Regulation E of the Electronic Fund Transfers Act provides consumers of mainstream financial services robust protections on their credit and debit cards. Protections include limitations on consumer liability for lost or stolen cards and requirements that banks provide consumers with important information in the form of bank statements, receipts, and notifications. In addition to Regulation E, people utilizing mainstream financial services have the benefit of having the Federal Deposit Insurance Corporation (FDIC) insure their bank accounts up to $250,000 and perform bank examinations in which the FDIC tests the safety and soundness of financial institutions. Since the establishment of the FDIC in 1933, no depositor has ever lost money from FDIC-insured funds.
The protections provided to those utilizing mainstream financial services do not extend, however, to people using alternative financial services (AFS). There are 34 million unbanked or underbanked Americans. These people rely heavily on AFS products such as check cashing, prepaid cards, and payday loans. In particular, the use of prepaid cards has seen enormous growth in recent years. According to the Consumer Financial Protection Bureau (CFPB), the dollar amount loaded onto prepaid cards from 2007 to 2011 grew 477% ($12 billion in 2007 compared to $57.2 billion in 2011).
Prepaid cards function similarly to debit cards in that they can be used to withdraw cash at ATMs, purchase goods in stores, purchase products on the internet or pay bills; however unlike debit cards they are not attached to bank accounts. Since prepaid cards are not subject to Regulation E, consumers of prepaid cards often find themselves paying fees without receiving clear notices or explanations. For example, many of these prepaid cards automatically initiate a line of credit to people that overdraft their cards, thus turning a prepaid card into a credit card without notifying the consumer. A Pew Charitable Trust study found that just 5 out of 52 prepaid card plans disclosed overdraft fees and overdraft credit plans.
The study also found discrepancies among the various prepaid card plans on a range of fees including lost or stolen card fees, fees for obtaining a card, and fees for speaking to a live customer services representative. Because these cards are not subject to Regulation E, consumers are not always notified of the complicated fee structures that vary significantly from card to card. This is one reason why consumer protection advocates are pushing for greater protections for prepaid card consumers.
In October, Wal-Mart and American Express launched a new prepaid card called Bluebird. This new product is better than some prepaid cards on the market in that it complies with most of the consumer advocate recommendations regarding fees. Yet, like many prepaid cards, it is not insured by the FDIC. And even if it complied with the FDIC’s pass-through insurance requirements (which would allow the card to be covered by FDIC insurance), there would be no easy way for a consumer to determine whether or not such coverage is indeed in place.
Thus, while Wal-Mart’s card might be a good product within the realm of the alternative financial services industry, it is not as good as a mainstream, regulated, and insured debit account. Instead, more banks should be encouraged to offer Model Safe Accounts and participate in Bank-On programs that can provide the 34 million un- and underbanked households with affordable bank accounts.
This blog post was coauthored by Alex Hoffman.