Fed Proposed Debit Interchange Fee Cap Rule Could Have Unintended Consequences for Government Benefit Cards, Flexible Spending Accounts and Reloadable Prepaid Cards

/PRNewswire/ -- The Network Branded Prepaid Card Association (NBPCA) is concerned that the interchange fee structure and network routing terms announced by the Federal Reserve in its proposed rulemaking will inevitably increase costs to consumers and issuers. Operational flaws, such as requiring prepaid gift cards and flexible spending account cards to include PIN-based debit, not only serve no purpose but also create inefficiencies, increase risk of fraud and unnecessarily raise costs.

Of particular concern to the prepaid card industry is the proposed rules do not clarify how the critical exemptions for government benefit cards and reloadable prepaid cards would be implemented by the card networks under the proposed interchange fee cap rule, as mandated by the Dodd-Frank Wall Street Reform Act. This fact was noted during yesterday's meeting, when a Federal Reserve official acknowledged the proposed rule permits but does not require card networks to allow a higher interchange fee for government benefit cards, reloadable cards not marketed as gift, or cards issued by banks with less than $10 billion in revenue. The official added if it becomes problematic for the card networks to implement the exemptions, then the lower interchange rate would apply.

"At a time of historic economic hardship, millions of Americans rely upon government benefit cards and reloadable prepaid cards as a secure, convenient, non-stigmatizing payment tool to make everyday purchases," said Kirsten Trusko, NBPCA President and Executive Director.

"NBPCA looks forward to submitting comments to the Federal Reserve and hopes it will clarify how exemptions will be handled in its final rule. Failure to do so could reduce the availability of prepaid cards, resulting in a catastrophic impact on consumers and governments," added Trusko

Financial institutions offer government benefit cards to states at little to no cost because they receive revenue primarily from the debit interchange. Nearly every state in the nation (47 states) either uses prepaid cards or is in the process of setting up programs to administer a variety of benefits, such as unemployment and Temporary Assistance to Needy Families (TANF) to millions of needy Americans.

The US Treasury dispenses Social Security benefits through its Direct Express government benefit card. Not only do states save money from check related costs, which is critical at a time when states are experiencing huge budget deficits, but consumers benefit from receiving their funds more efficiently and quickly through this electronic payment tool. Without the exemption from the lower debit interchange fee, it is likely banks will be forced to reduce or eliminate the availability of government benefit cards to nearly every state in the nation.

Millions of unbanked and underbanked individuals also rely upon prepaid cards to participate in our card based economy. It is quite probable if these cards aren't exempted from the interchange fee cap, prepaid card users will be subject to merchant minimums for credit cards because clerks could confuse the cards with credit cards and deny prepaid cardholders from making basic purchases like milk and eggs.

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Consumers Union Report: Prepaid Cards Come With Long List of Fees and Weak Consumer Protections

/PRNewswire/ -- Prepaid cards continue to grow in popularity, but this new form of plastic payment comes with high fees and weaker protections than those offered by traditional debit or credit cards, according to a new report by Consumers Union, the nonprofit publisher of Consumer Reports.

Prepaid cards are reloadable cards that can be used to make payments similar to debit cards and are becoming the foundation of a second tier banking system used by a growing number of low income consumers.

"Prepaid cards come with a long list of fees that are often hidden deep in the fine print," said Michelle Jun, Staff Attorney for Consumers Union. "Consumers considering prepaid cards should be aware that those fees can add up quickly and that they may be vulnerable to losing their money if their card is lost or stolen."

Prepaid cards are a growing business and usually bear a network logo such as Visa or MasterCard and often have the word "debit" printed prominently on the front of the cards. The Federal Reserve estimated that 312 million transactions were made with prepaid cards in 2006 for a total value of $13.3 billion. These numbers have undoubtedly continued to rise as the prepaid card industry has worked to enroll the millions of unbanked and underbanked consumers.

Consumers Union reviewed the terms and conditions of 19 different prepaid cards and found that consumers face multiple fees and other costly "gotchas":

-- Activation Fees: 12 of the 19 prepaid cards reviewed charged
consumers a fee for activating their cards. These activation fees
ranged from a low of $3 for the Walmart Money card and the nFinanSe
card to a whopping $39.95 for the First Vineyard card.
-- Monthly Fee: 16 of the 19 prepaid cards charged monthly fees ranging
from $2.95 per month for the nFinanSe card to $9.95 per month for the
NetSpend VISA card, Rush card, and AccountNow card. Most prepaid card
issuers will waive the monthly fee if a direct deposit is set up.
Some card issuers will waive the monthly fee if the consumer chooses
the "pay as you go" option. The Green Dot card charges a $5.95
monthly fee unless the consumer maintains a $1,000 balance or has 30
posted transactions.
-- Fees to Get Cash: All 19 prepaid cards reviewed charged fees for
withdrawing cash from ATMs in the U.S. On the low end, consumers
using the nFinanSe card are charged 99 cents per withdrawal.
Consumers using the NetSpend Visa card, AccountNow card, and Bank
Freedom card are charged $2.50 for each withdrawal. In one case (Rush
card), consumers were given two free withdrawals but then charged
$2.50 for each additional withdrawal. Consumers using the Green Dot
card get free withdrawals at in-network ATMs, but are otherwise
charged $2.50 per withdrawal. Fees were even higher for international
withdrawals.
-- Balance Inquiry Fees: 18 of the 19 prepaid cards charged fees for
checking balances at ATMs, ranging from 45 cents to $1. This does not
include any additional fee charged by the ATM owner.
-- Paper Statement Fees: 15 of the 19 prepaid cards charged fees for
providing consumers with a paper statement detailing transactions on
their account. Paper statement fees ranged from $1 to $5.95. All 19
prepaid card issuers provide free access to account statements online.
-- Customer Service: Most pre-paid card issuers provide free customer
service, but consumers using the BuyRight card will be charged $1 to
speak to a customer service representative, while users of the Exact
card will pay $3.95 for doing so. Some prepaid card issuers charge
customer service fees after a limited number of free calls.
-- Fees for Inactivity: 9 of the 19 prepaid cards charged fees when
cards are not used after a certain period of time. These dormancy
fees range from $1.95 per month for the Rush Card (after 90 days of
inactivity) to $9.95 per month for the Exact card.
-- Overdraft Fees: A number of prepaid card issuers claim that they do
not charge fees when users spend more than the available amount on
their cards. However, Consumers Union found that 13 of the 19 cards
it reviewed included overdraft or "shortage" fees. Most of the card
issuers that charge an overdraft fee do not specify the amount of the
fee. Instead, the card agreement indicates that consumers will be
charged "applicable fees" for the shortage.


When prepaid cards are lost or stolen and used by others to make fraudulent transactions, consumers are not protected by the same regulatory and statutory safeguards that enable other debit card users to recover their money. If a consumer contacts a card issuer about a lost or stolen debit card within two business days, the consumer's liability is limited to up to $50 (or up to $500 if the consumer reports the debit card lost or stolen after two business days). By contrast, prepaid cards may only have voluntary protections that could be revised or rescinded at any time for any reason.

Some prepaid cards claim to provide consumers a way to build a credit record or include a credit line feature. However, Consumers Union found that the prepaid card issuers may report "credit building" activity to an alternative, less used credit reporting agency or may report only the payment of the card's high monthly fees. The credit line feature may provide credit which is as expensive as costly overdraft loans and payday loans.

Finally, consumers with traditional bank accounts have peace of mind that their money will not be lost as long as their bank is FDIC insured. But consumers who use prepaid cards have no guarantee that they will be able to recover all their money in the event of a bank failure because the funds may not be insured by the FDIC.

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FDIC Urges Stronger Debit Card and Overdraft Oversight; Other Bank Regulators Should Take Action

/PRNewswire/ -- Statement of CRL president Michael D. Calhoun: "American families, especially those most vulnerable financially, could save millions of dollars a year in costly overdraft fees if guidelines the FDIC proposed today are adopted. The guidelines would encourage the banks the FDIC oversees to offer customers lower-cost overdraft alternatives rather than charge unlimited high-cost overdraft fees--as many banks do, even on small debit card transactions.

Under the proposal, a bank would contact a customer who incurs six overdraft fees within 12 months and offer--and explain--less costly options. The bank would be encouraged to provide the customer with a reasonable opportunity to choose one of them. Banks the FDIC oversees also would be discouraged from re-ordering transactions to maximize overdraft fees.

Banks and credit unions frequently promote their most expensive form of overdraft coverage, which typically imposes a $34 fee per overdraft--twice the amount of the typical debit card purchase that triggers an overdraft--rather than reasonably priced options like a low-interest line of credit or an affordable small-dollar loan. Financial institutions earn $24 billion annually from these high-cost programs.

The proposal comes just days before new Federal Reserve's August 15th rules take effect requiring banks and credit unions to obtain a customer's signature before enrolling them in a costly overdraft program for debit cards. But many banks don't give consumers real choices among alternatives; instead, they steer customers into the highest cost overdraft coverage they offer. The FDIC's proposed guidance indicates the Fed's rule is not sufficient to stop unfair and abusive overdraft practices by lenders: The Fed addresses neither the size of the fees nor how many can be charged.

A decade ago, most banks declined debit card transactions, and at no charge, when a customer's account lacked sufficient funds. Citibank has never charged overdraft fees on debit cards, and Bank of America is stopping the practice. But another big bank, Wells Fargo, continues to charge over a billion dollars a year in debit card overdraft fees. Wells also continues to market a cash advance product that, like payday lending, carries triple-digit annual interest rates.

To comprehensively address abusive short-term loan products, including unfair overdraft practices, the Federal Reserve and the Office of the Comptroller of the Currency must join the FDIC's efforts and explicitly limit overdraft fees to no more than six per year. In addition, all regulators should require that the size of the overdraft fee reflect a lender's cost and risk, and they should ban the manipulation of transaction postings."

For CRL's research on banks' overdraft marketing efforts, see http://www.responsiblelending.org/overdraft-loans/research-analysis/banks-targ et-mislead-consumers-as-overdraft-deadline-nears.html.

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Consumers Union Urges Fed to Require Banks to Roll Back Recent Unfair Credit Card Interest Rate Hikes

/PRNewswire/ -- After Congress passed legislation last year reining in some of the worst credit card lending practices, many banks responded by hiking interest rates before the new rules went into effect, including on customers with perfect bill paying records. Now Consumers Union, the nonprofit publisher of Consumer Reports, is calling on the Federal Reserve Board to require banks to roll back those unfair interest rate hikes and to put stronger limits on the size of penalty fees and interest charges.

The Fed has already proposed new regulations that would limit penalty fees and require banks to reconsider interest rate hikes imposed during the year leading up to the enactment of key CARD Act protections on February 22, 2010. But the proposed regulations don't go far enough according to Consumers Union and should be strengthened to ensure consumers are more likely to see their old interest rates reinstated and don't face unfair penalty fees and charges in the future.

"Last year's shameful frenzy of credit card interest rate spikes has saddled millions of Americans with high cost debt, including many consumers who always paid their bills on time," said Lauren Bowne, staff attorney for Consumers Union. "The Fed should undo that damage by requiring banks to lower interest rates for customers who were treated unfairly before the new credit card protections went into effect."

The Fed's proposed regulations would require banks to review interest rate hikes made on customers between January 2009 and February 22, 2010 and to reduce those rates "as appropriate." But under the proposal, banks are allowed to keep secret their review process with no oversight by the Fed.

Banks could keep the higher interest rate if the reason for the old rate hike still exists, or if the bank decides to come up with a new reason for the higher rate. Banks would not be required to start this "look back" process until six months after the regulations go into effect - in other words, starting in late February 2011.

Consumers Union urged the Fed today to strengthen the rate review proposal by:

-- Requiring banks to reinstate the old interest rate if the reason for
the rate hike would not have been allowed under the new protections
afforded by the CARD Act.
-- Requiring banks to disclose the methodology they use to review rates
and to report to the Fed twice each year the number of rate increases
reviewed and the number of rate reductions that result.
-- Requiring banks to begin reviewing rate increases on August 22, 2010,
when the rate review provision goes into effect.


Thousands of consumers have contacted Consumers Union over the past year to complain that their credit card interest rates were raised unfairly. Many consumers reported that their banks acknowledged that interest rates were raised because of the economy or a change in market conditions and not because of anything wrong done by the consumer. Other consumers reported that their interest rates doubled or tripled after they were a day or two late making their payment or for other minor mistakes. Before the new credit card protections started on February 22, banks were allowed to raise interest rates on existing balances at any time for any reason.

Starting on February 22, banks were prohibited from raising interest rates on a credit card customer's existing balance unless the customer has a variable rate card, a promotional rate has expired, or if the customer is more than 60 days late making the minimum payment.

The Fed also has proposed regulations required by Congress under the CARD Act that are meant to ensure penalty fees and charges are "reasonable and proportional" to the customer's violation of the credit card contract. However, the Fed's proposed rule only applies to penalty fees such as those imposed for going over the limit or being late with a payment and not penalty interest rates.

Under the Fed's proposal, penalty fees would be allowed only if a bank can show the fee is a reasonable proportion of the total cost to the bank caused by the customer's violation of the credit card agreement or if the bank proves that the fee amount is necessary to deter the same kind of violations in the future. The rule also proposes a complicated "safe harbor" provision which allows a bank to pick a permissible fee amount without doing the cost or deterrence analysis.

Consumers Union urged the Fed to broaden its proposed regulation so it extends to the size of penalty interest rate hikes in addition to fees and to limit those rate increases to no more than seven percentage points above the non-penalty interest rate. Consumers Union called on the Fed to simplify and strengthen the "safe harbor" provision for penalty fees by setting it at five percent of the violation or no more than $10.

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Consumer Groups Call On Fed to Adopt Stricter Gift Card Rules

/PRNewswire/ -- In comments filed with the Federal Reserve Board today, consumer groups urged regulators to rein in gift card fees and related terms and conditions that can quickly diminish their value. The Fed is considering a set of proposed gift card regulations that are required under the Credit CARD Act of 2009 and will go into effect on February 22, 2010.

"Banks earn billions every year from gift card fees just because consumers don't always get around to using their cards right away," said Michelle Jun, staff attorney with Consumers Union. "Congress passed limits on gift card fees earlier this year and now it's up to the Fed to make sure consumers are fully protected. The Fed should impose reasonable limits on fees so consumers stand a better chance of enjoying the full value of the gifts they receive."

Many consumers end up losing money on their gift cards because they don't redeem them right away. A recent Consumer Reports poll found that one quarter of those given gift cards last holiday season still have at least one card they haven't used and 11 percent of recipients have four or more. The TowerGroup estimated that about $8 billion remained unredeemed on gift cards in 2006.

In a letter to the Fed today, Consumers Union, Consumer Action, Consumer Federation of America, and the National Consumer Law Center urged regulators to:

-- Cap the amount that gift card issuers can charge for inactivity fees.
The Credit Card Act of 2009 prohibits card issuers from charging
inactivity fees on cards if they have been used within the past 12
months. After twelve months of inactivity, card issuers will be
allowed to charge a monthly inactivity fee. Consumers Union urged the
Fed to protect consumers more fully by limiting the amount that that
can be charged for inactivity to no more than the actual cost incurred
by card issuers for maintaining the card.

-- Limit fees on low value cards. Consumers Union urged the Fed to
follow the lead of states like California, Oklahoma and Washington
which have limited fees that can be charged for inactivity when the
balance on the card is $5 or less. These states limit card issuers to
charging a $1 per month fee.

-- Limit when inactivity fees can be charged. Many consumers report that
they face difficulties using their gift cards because merchants often
will not accept their cards when they don't cover the full cost of the
purchase or when they cannot determine the remaining amount on the
card. Consumers Union urged the Fed to count such transactions as
"activity" on the card so that consumers don't start incurring
inactivity fees when they've attempted to use them.

-- Make sure consumers are protected from early expiration of gift cards.
Under the Credit Card Act of 2009, gift cards cannot expire less than
five years from the date the card was purchased or money was last
added to the card, whichever is later. However, many gift cards are
stamped with a "valid thru" date," which is the estimated lifespan of
the card's magnetic stripe and could be less than five years from the
time the card was purchased. Consumers Union urged the Fed to require
card issuers to select expiration periods long enough that the card
will have at least five years of remaining life when it is purchased.
Card issuers should be required to disclose on the card that the card
may be valid beyond the date imprinted on it and to provide an 800
phone number on the card that consumers can use to easily find out
when their cards actually expire.

-- Protect consumers from losing funds on lost or stolen prepaid cards.
Prepaid cards are reloadable cards that can be used to make payments
similar to debit cards and are becoming increasingly popular. But
consumers using prepaid cards don't enjoy the same safeguards as debit
cards if their cards are lost or stolen and could end up losing all of
their funds. Consumers Union urged the Fed to ensure that prepaid
cards come with the same protections as debit cards so the consumer's
liability is limited to $50 and he or she can recover missing money.


The new gift card regulations will cover both retailer gift cards and prepaid general use gift cards (the ones that often are branded as Visa, American Express, MasterCard, or Discover). The law does not cover rewards, loyalty, telephone or promotional cards and does not cover paper gift cards or paper gift certificates.

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