Repealing CFPB's Prepaid Card Rule
February 10, 2017
Millions of Americans, mostly young, poor, and minority, either do not have a bank account or are “under banked” – meaning they do not have access to a full range of basic financial services. Life without a bank account can be very difficult in America today. You can’t cash checks, order products online, or get credit for emergencies.
Fortunately, recent advances in technology have enabled some entrepreneurs to help address this problem by creating prepaid cards that allow many unbanked and under banked Americans to participate in the economy.
According to one source, while consumers put less than $1 billion on prepaid cards in 2003, by 2012 that number had risen to $65 billion and is expected to reach $121 billion by 2018.
There is obviously a need for prepaid cards and the market is meeting it.
Unfortunately, the Consumer Financial Protection Bureau (CFPB), created under President Obama, believes that regulation and paternalism, not voluntary cooperation and free-enterprise ingenuity, are the best tools to address the problems of the unbanked.
In November of last year, the CFPB released a finalized rule that imposes new and onerous standards on the burgeoning market that will affect not only pre-paid cards, but a laundry list of other pre-paid products. In the document, CFPB’s bureaucrats establish new rules and regulations for this vast range of pre-paid consumer options and declare their intent to “close loopholes and protect prepaid consumers when they swipe their card, shop online, or scan their smartphone.”
Proponents of the rule, including the regulators at CFPB, argue that these standards protect unsuspecting pre-paid customers from becoming victims to overdraft fees and other abuses that result from predatory lenders.
Despite these good intentions, the CFPB’s pre-paid card rule misses the mark – and the basic point of pre-paid cards. Arguably, one of the reasons pre-paid products are so popular, especially among millennials, is that they function like a simplified version of a bank account, without all the bells and whistles. The overdraft feature is an option, fueled by consumer choice, which users are free to utilize for a number of reasons – the most popular of which seems to be in cases of emergency. Furthermore, only 10 to 15 percent of prepaid products include this feature, giving most consumers the option to choose what kind of pre-paid product best suits their needs.
The underlying assumption behind this rule seems to be that American consumers are uninformed, uneducated, and unable to make their own choices – unwitting simpletons who are, at any given moment, vulnerable to the predatory behavior of villainous financial institutions. But this implicit condescension doesn’t conform with reality. In fact, the prepaid-product market has proven to be incredibly competitive and functional that responds well to consumer preferences. It is clear that many pre-paid users actually like the overdraft feature, which means the CFPB rule would limit consumer choice by killing a feature preferred by a significant portion of the market.
That is why I cosponsored a resolution this week that would use the power of the Congressional Review Act (CRA) to undo this regulation. This CFPB prepaid rule is one of just many midnight regulations that the Senate and House will hopefully repeal in the coming weeks.