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Prepared Remarks by Richard Cordray
Director of the Consumer Financial Protection Bureau
Prepaid Cards Field Hearing
May 23, 2012
Thank you for joining us today. We love getting outside the Beltway and connecting with the people we work for every day – which is all of you.
Let me welcome you to our event today and ask that you take a moment and think about what life is like for those who are outside the banking system. What is life like if you do not have a checking account, a debit card, or a credit card? Then suppose you could not even qualify for any of these products. How would you convert your paycheck into money you can spend? How would you go about paying your bills? How would you keep your money safe?
About 9 million American families find themselves in precisely that situation. They are known as the “unbanked.” Some of them have been locked out of the banking system after experiencing troubles with their accounts; others have never opened an account in the first place. Another 21 million families are the so-called “underbanked” – although they actually have a bank account, they often use nonbank products to meet their financial needs. But these are just labels. The tens of millions of Americans who bear these labels are just hard-working people living paycheck to paycheck, like a lot of other people, and waging a constant struggle to make ends meet.
In recent years, many of these families have turned to a relatively new type of product: a prepaid card. Consumers can load money onto these cards and then use them for everyday purchases, just like a debit or credit card, but without having to be attached to an individual bank account.
As the prepaid card industry has grown, it has attracted a wide range of consumers. Some prefer to use prepaid cards for online shopping. Others use prepaid cards while traveling. Still others turn to prepaid cards as a budgeting tool, as is true, for example, of parents who send their children off to college with a prepaid card.
All these consumers need, and deserve, products that are safe and whose costs and risks are clear upfront. Yet right now prepaid cards have far fewer regulatory protections than bank accounts or debit cards or credit cards. And that is especially troubling because the people who use prepaid cards are, in many instances, the most vulnerable among us. Every dollar they pay in hidden fees is a dollar they cannot spend on supporting their families. These consumers are least able to take a hit if their prepaid card is lost or stolen, and yet they often have no guaranteed protection against this kind of a disaster.
For these reasons, we are announcing today that the Consumer Bureau is initiating a rulemaking process to address prepaid cards. We are launching the process by reaching out to the public for feedback and insight. We will get your perspective at today’s field hearing, and we will solicit public feedback through a formal comment process. In these ways, you will help us decide how we should go about regulating prepaid cards to better protect consumers and to provide clear rules for prepaid providers.
At the Consumer Financial Protection Bureau, we now oversee all consumer financial markets, ranging from mortgages to bank accounts to credit cards to student loans, and on and on. In the grand scheme of this universe of financial products and services, which is worth trillions of dollars, prepaid cards are not yet all that large. But this product is growing by leaps and bounds, at an expected rate of over 40 percent each year from 2010 to 2014. The two largest program managers for prepaid cards have reported a jump from 3.4 million active cards to more than 7 million active cards just in the past three years. And industry analysts predict that at the rate things are going, the total dollar amount that consumers will load onto prepaid cards will be nearly $167 billion two years from now.
Much of this growth is coming from consumers who may be using this product as an alternative to a checking account by loading their wages onto a prepaid card. For example, the largest program manager in the nation reported that the direct deposit of funds increased by nearly 70 percent last year. And the second largest program manager reported that 42 percent of its customers had signed up to link their cards to a method of directly depositing funds.
In fact, one of the reasons many consumers choose a prepaid card is because the fees on the card may be lower than the fees they have paid – including overdraft fees – on a checking account. Other consumers like the fact that the majority of prepaid cards do not let them overdraw the amount of funds available to them, so they use the cards as a budgeting tool.
As the market for prepaid cards expands, it is attracting new players. Some are large banks and others are not banks at all. At the Consumer Bureau, our authority is not limited solely to banks, and in fact we are working to level the playing field among all financial institutions in order to protect consumers.
The expanding prepaid market means that new cards are entering the market constantly. These new cards sometimes come endorsed by a celebrity spokesperson. From the Kardashian sisters to baseball stars like Alex Rodriguez to the characters from the movie Twilight, we have seen all kinds of well-known people vouching for the benefits of prepaid cards or gracing the front of them. But this kind of celebrity marketing can be an unhelpful distraction to consumers who do not understand how the card works or how different the various cards can be, all of which makes it hard to tell whether a particular card is a good choice for their financial needs.
We are at a critical moment in the growth of the prepaid market. At the Consumer Bureau, our job is to do all we can to ensure that financial products and services actually help consumers rather than harm them. We want good practices to be instilled early on so that as the market grows, it does so responsibly. Clear rules in the prepaid market will help prevent the spread of “low-road” competition that hurts both consumers and the honest businesses that seek to serve them well.
Over the course of this rulemaking, we are going to focus on two key issues: safety and transparency. We believe that innovation can bring great benefits to consumers and can provide those outside the traditional banking system with more access to financial products that meet their needs. But we have a duty to make sure these products are safe for consumers and that prepaid card issuers do not make money by relying on tricks or traps that are unsustainable for cardholders. Success in the marketplace is hollow if it comes at the expense of consumers.
Many of us have experienced a time when we could not find our wallet, or when we realized with a sinking feeling that we had left a credit card or debit card behind after making a purchase. Others may have been victimized by someone who hacked into their accounts and racked up unauthorized charges on their credit cards or debit cards. After recovering from your anxiety or your anger, your next step begins to get you back on track: calling your bank or your credit card company and reporting what has happened.
For debit and credit cards, federal law determines what happens next. Your responsibility for unauthorized charges is limited. Also, federal law provides a framework for resolving errors and disputes about unauthorized charges and ensures you have information on how to do so. In other words, the law provides considerable security to debit and credit cardholders against unexpected losses.
In contrast, prepaid cards do not have the same legal protections. Although the networks that process prepaid card transactions – such as Visa, MasterCard, American Express, and Discover – do require prepaid card issuers to provide contractual protections to cardholders, those protections are not as strong as those for debit cards and credit cards and they are subject to change at any time. That is why we are considering how best to extend protections to prepaid cardholders in the event that a card is lost or stolen, unauthorized charges are made, or a processing error results in an incorrect charge amount.
Of course, even if the funds are secure, a prepaid card can still be risky for consumers in other ways. If you do not know the card’s fee structure, it is easy to rack up charges unknowingly. And some prepaid cards do allow consumers to overdraw the money on the card and incur overdraft fees. So we are taking a close look at the costs, benefits, and protections related to overdraft features offered on prepaid cards.
As part of our mission of making the markets work for consumers, we often find that consumers do not have the information they need to make sound decisions. This can also be the case with prepaid cards.
Some prepaid cards have a very simple fee structure, with only one or two fees. Others use more of a cafeteria-style approach to pricing, with separate fees being charged to load money onto the card, withdraw money from the card, make a purchase, check a balance, or even call customer service. That consumers can choose which type of prepaid card is best suited to their needs is potentially an advantage. But that is only true if consumers can compare products side by side.
We heard from one consumer who went to check the balance on her prepaid card at an ATM and found it was less than she expected. After checking her balance again to confirm what she thought was an error, she called customer service. Unbeknownst to her, there was a fee for each of these actions and her balance kept dropping. We believe it is important for companies to be upfront with consumers. If the company charges a fee for withdrawing money from the card, then consumers should know about it.
Unfortunately, consumers often do not have this information until after they have purchased the prepaid card. Some cards will list major disclosures on the exterior packaging. However, with other cards, the fees, terms, and conditions that apply to the card are printed on an inner flap or in a magnificent origami pamphlet located inside the package; hence they go undisclosed until after the card has been purchased. Today it is up to card issuers to decide what information is disclosed and how.
Another fact that is important for consumers to know is whether funds that they load onto prepaid cards are protected by FDIC insurance. When consumers place funds in a credit union or bank account, they take comfort in the fact that their money is federally-insured up to $250,000 or more. But this guarantee does not necessarily apply to money loaded onto prepaid cards.
Instead, companies that offer prepaid cards generally pool all the money loaded onto their cards in a single account. Some issuers have structured these pooled accounts in such a way that each of the cardholders has the benefit of FDIC insurance should anything happen to the bank. But there is no reliable data on how often this protection is provided. And there is no requirement that issuers provide this protection. Because consumers often have no way of knowing how the banks are treating their funds, we will consider how best to let consumers know about the risks to the safety of their funds.
So the Bureau is asking for input on how we can make the costs and risks of prepaid cards clearer and more accessible for consumers. We know this can be challenging when prepaid cards are sold in a retail setting in packages where space is at a premium. But consumers need to know this information so they can make the comparisons necessary to shop around and reduce surprises by understanding the true cost of the product.
Indeed, for free markets to work as they should, people need to be informed so they are able to “vote with their feet.” Without knowing the key terms of the card and without knowing them ahead of time, it is impossible for that to happen.
We are also launching Ask CFPB: Prepaid Cards to help consumers understand this fast-growing product. Ask CFPB is an interactive online tool with easy-to-understand answers to some of consumers’ frequently asked questions. Ask CFPB: Prepaid Cards includes more than 80 questions and answers from our staff experts. These new entries give consumers an overview of prepaid cards and help address questions about obtaining, reloading, and using prepaid cards.
Safety and transparency: these are and should be important hallmarks of all consumer financial products and services. As part of our rulemaking, we will explore how best to extend these basic protections to prepaid cardholders whose funds may be at risk. We are working to provide evenhanded oversight of the consumer financial markets. We are committed to a careful and constructive rulemaking process based on broad input and grounded in all the data we can assemble around these issues.
Your comments and ideas, and those of everyone else who takes the time to share their perspectives with us, will inform our ultimate decisions about how best to regulate prepaid cards in order to protect consumers. We look forward to a frank discussion and a productive result both for consumers and for the honest businesses that seek to serve them well.