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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