Iowa Banking Law Blog

Prepaid cards face scrutiny
Jun. 1, 2012The Dickinson Law Newsroom, Iowa Banking Law Blog, Iowa Employer Law Blog
Prepaid Cards Scrutinized

There has been much in the news of late about the use of prepaid cards and increased scrutiny by the Consumer Financial Protection Bureau (CFPB) due to potential abuses.  Prepaid card use is growing exponentially among the “unbanked” and “under banked.”  These cards are used for government disbursements, payroll, employee benefits, health care, and gift giving.  Prepaid cards are popular for those who do not use checking, debit or credit cards.  CFPB Director Richard Cordray indicates currently more than seven million Americans use prepaid cards.

Although prepaid cards operate similarly to debit cards, they are not linked to a bank account and are, thus, outside the regulation of federal consumer protection laws applicable to debit and credit cards.  Depending on the prepaid card, consumer redress for theft, loss or unauthorized charges vary widely.  As well, many prepaid card services lack clear consumer disclosure for overdraft fees and surcharges.

The CFPB announced last week that it will examine prepaid cards to consider new regulations to protect consumers.  In a field hearing held recently in Raleigh, North Carolina, recommendations for regulation and oversight of prepaid cards included expanding the current regulatory framework for credit and debit cards to prepaid cards, imposing FDIC insurance requirements and mandating clear, standardized disclosure for fees and surcharges.

This issue will be one to watch as industry analysts estimate the use of prepaid cards to grow by 40% each year through 2014 with $167 billion loaded onto prepaid cards in the next two years.

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Industry Categories: Banks & Financial Institutions
Practice Area Categories: Banking Law

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