CFPB Creates Stronger Protections for Prepaid Card Users

October 5, 2016, Written By John H. Oldshue

Today, the Consumer Financial Protection Bureau (CFPB) created stronger federal protections for the 23 million adults in the United States who use prepaid cards each month. These consumers are using prepaid cards to make payments, store funds, withdraw cash at ATMs, receive direct deposits and send money to others.

The new rules require financial institutions to limit customer losses if a card is lost or stolen, investigate and resolve errors quickly and give cardholders free, easy access to account information. Prepaid companies must also give customers similar protections offered to credit card holders if the bank agrees to extend credit past the amount preloaded on to the card. In addition, the CFPB has created an industry-standard “Know Before You Owe” disclosure for prepaid accounts that give cardholders clear information about fees.

“Many consumers rely on prepaid cards to make purchases and access funds, but until now they were not guaranteed strong consumer protections under federal law,” said CFPB Director Richard Cordray. “This rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone. And it backs up those protections with important new disclosures to let consumers know before they owe.”

Prepaid cards, which are generally purchased online or at retailers, are the fastest growing financial product in the United States. The amount of money put on such cards grew from $1 billion in 2003 to nearly $65 billion in 2012. Experts believe this amount will balloon to $121 billion by 2018. Even with their popularity, consumers did not have federal protections on these cards until recently.

The new federal regulations do not just apply to prepaid cards. They also cover mobile wallets, person-to-person (P2P) payments and other electronic prepaid accounts, such as payroll, student financial aid disbursement, tax refund and federal state and local government cards.

Specifically, the new regulations provide:

  • Free access to account information. Financial institutions must make it easy for consumers to get information about their accounts and provide free account information via telephone, online and in writing, upon request. Consumers will now have access to their account balances, transaction history and fees.
  • Error resolution rights. Prepaid card issuers must work with consumers who discover unauthorized or fraudulent activity on their cards. Investigations must be timely, and funds must be restored, where appropriate. If the financial institution cannot conduct an investigation in a timely manner, they must now provide the customer with provisional credit.
  • Protection for lost cards and unauthorized transactions. Consumers now have limited liability for unauthorized charges, and financial institutions must refund their money in a timely fashion. As long as a customer notifies their card issuer of fraudulent activity promptly, they will only be held responsible for $50 of unauthorized charges.

According to a Pew survey, many prepaid card users are “unbanked,” which means they do not have a traditional bank account and rely on prepaid cards to complete transactions. 72% of the Pew respondents said they are using prepaid cards to avoid overdraft fees, and 86% said they would rather have a transaction declined than pay a $35 overdraft fee. Because consumers are using prepaid cards to improve their financial situation, the new CFPB rules should help keep them out of debt.

The information contained within this article was accurate as of October 5, 2016. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.