Approximately 37 million American adults don’t have a checking account or have one that they use infrequently. Often described as “unbanked” or “underbanked”, these individuals typically choose not to maintain a checking account to avoid high banking fees, particularly overdraft penalties. Prepaid debit cards offer an attractive alternative to traditional banking for this large segment of the population, but a new rule levied by the Consumer Financial Protection Bureau could impact the way individuals use this convenient payment method.
Why Consumers Love Prepaid Debit Cards
Prepaid cards are easy to use and easily accessible; consumers are able to purchase them at both large retail outlets and small convenience stores, and they may use them at any retail location that accepts the logo on the front of the card. For years, underbanked individuals have relied on prepaid debit cards to complete a variety of transactions, such as purchasing fuel, getting cash back at the register or ATM, and even booking airline tickets.
As a result, the prepaid debit card industry has quickly become very lucrative. Consumers loaded a collective $65 billion onto their prepaid debit cards in 2012 alone—twice the amount added to prepaid accounts in 2009. The CFPB expects this value to double again by 2018, as the amount of people using prepaid debit cards increases exponentially with each passing year.
Another reason that unbanked adults have flocked to prepaid cards is transparency. Consumers have long recognized how dangerous overdraft fees can be for their financial health, often complaining of large overdrafts for small items and seemingly disingenuous tactics used by banks to charge higher penalties. In contrast, prepaid card issuers generally disclose all fees upfront, and there has traditionally been no danger of accidentally overdrawing a prepaid card. Consumers can only spend what they load on the card, and a balance of zero will result in declined transactions. However, this could all change come October 2017, when a new rule enacted by the Consumer Financial Protection Bureau (CFPB) will allow some prepaid debit cards to begin charging overdraft fees.
CFPB’s Rules and What They Mean for the Industry
In October 2016, the Consumer Financial Protection Bureau finalized rules that will allow prepaid debit card issuers to provide overdraft protections similar to those offered by checking accounts. However, unlike a checking account, prepaid debit cards that provide overdraft protection would require consumers to apply for the service; it would not be present by default for all card users. Additionally, prepaid card issuers must wait 30 days to offer overdraft protections to new card owners, and overdraft charges will remain completely separate from customers’ main prepaid debit card accounts.
Instead of having fees automatically deducted from their prepaid card balances, customers will receive monthly statements assessing their overdraft charges. Although card holders will have to send in a separate payment for these bills, they will still be able to reload their cards and make purchases. By requiring holders to pay any outstanding overdraft charges separately, the CFPB’s new rules pave the way for prepaid debit cards to become more similar to credit cards.
