CFPB ruling on force-pay could affect US prepaid card market

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The Consumer Financial Protection Bureau (CFPB) of the US has proposed a rule change that seeks to categorize prepaid cards that offer overdraft protection facility or force-pay transactions to cardholders, as a credit product rather than a banking product. A few card issuers in the US allow its prepaid card customers to overdraw their account, in a similar manner to a bank allowing its checking account customers to overdraw their account. CFPB is looking into categorizing prepaid cards that allow “force-pay” transactions as credit cards and bringing them under the purview of regulations governing credit cards and bank accounts in the country.

This is how force-pay transactions work: A few prepaid cards preauthorize charges based on an estimated purchase amount, for instance, expected price of eating at a restaurant. If the prepaid card does not have sufficient funds to cover the entire bill amount, the card is left with a negative balance, which is settled from the next deposit the consumer loads on the prepaid card. CFPB contends the function of prepaid cards is to allow people to spend only what they have and by allowing overdraft or force-pay, the primary function of the instrument is not being served. Many times it also happenes that cardholders are not aware that they have to pay an overdraft fees for such transactions.

Regulations for prepaid cards are less comprehensive than regulations for credit cards or bank accounts and CFPB’s move has got many card issuers worried that if force-pay transaction is not clearly dealt in CFPB’s final ruling, every prepaid card might have to be treated as a credit card. If this happens prepaid card issuers woule be required to conduct an analysis of the cardholder's ability to repay his or her debts, even for small sums that are involved in force-pay and overdraft protection programs. This in turn could turn out to be cost-prohibitive, driving many card issuers out of business, and subsequently leaving lesser number of products for consumers to chose from.

PayNXT360 believes that it is important for card issuers to be completely transparent about their fee structure and full disclosure regarding the product and its features should be made to customers to help them understand the product and make informed decision. To solve the contentious issue of force-pay, prepaid card issuers and CFPB should come together and introduce guidelines that are beneficial for both customers and card issuers. It is important to ensure prepaid card issuers’ profitability also so that many players remain in the market, driving competition, and providing a wide range of choices for customers.