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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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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