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On Wednesday the Fed issued its "final" Durbin regulation, Reg. II. The release is 307 pages. Amidst many details about subaccounts, fraud costs and routing options, there is a clarion wake-up call to the retail banking industry.
July 1 -
With prepaid products becoming more and more sophisticated, federal regulators are asking banks that offer such products to develop comprehensive risk-management policies and procedures to guard against potential fraud.
June 29 -
When American Express launched its prepaid card recently, experts compared it to the dominant prepaid cards in the market and called attention to the differences.
June 22
Many prepaid card companies will be forced to strip away features — or even change bank partners — if they want to qualify for exemptions from the new caps on debit interchange fees.
For banks to claim an exempt status for prepaid cards, their cardholders must not be able to access funds via check, automated clearing house, wire transfer or other methods under new language the Federal Reserve included in its final rules last week.
"We were very surprised by that," said Terry Maher, a partner with the Baird Holm LLP law firm and corporate counsel for the Network Branded Prepaid Card Association.
"We understand that there were concerns expressed that … it would become too simple for the nonexempt banks to flip debit cards to prepaid and then offer checking, remittance, ACH and bill pay," Maher said. Prepaid card companies that work with larger issuers will "either have to drop the" payments functionality or "keep those and have to increase the consumer costs," he said.
The caps, which will reduce the fees that banks earn on debit card purchases to about 24 cents per transaction from a current average of 44 cents, will take effect Oct. 1. Although prepaid cards, under certain conditions, could be exempt from that cap, they are not exempt from rules that require debit cards to carry multiple unaffiliated processing networks to give merchants routing choice. Those rules will take effect in April 2013 for prepaid cards.
When the Fed set its cap on interchange last week, it also acknowledged a concern raised by a merchant trade group that banks may "restructure accounts" to resemble prepaid cards in an attempt to get their debit cards exempted from the caps.
"The Board believes that reloadable cards that provide access to the funds underlying the card through check, ACH, wire transfer or other method … would not meet the" exemption requirement, the Fed's final rule said. The Fed said an exempt account could use those methods for a one-time cash out of the funds remaining on the card.
Many prepaid card marketers, including Green Dot Corp. and NetSpend Holdings Inc., already offered bank-like features on prepaid accounts, such as the ability to make bill payments over the ACH network. Now some of those features would make the cards subject to the interchange caps, which are expected to reduce the fees that big banks earn when a customer pays with a debit card by 45% compared with existing rates.
The rules will prompt prepaid card providers to weigh the costs of complying with the exemption against the potential revenue gains, said Ben Jackson, a senior analyst with the prepaid advisory service at Mercator Advisory Group. Banks that were looking to enter the prepaid market must also weigh the potential drawbacks.
"The balance that they're going to have to strike on these exemption provisions [is] going to have to be determined by a lot of different considerations, including how much money are they making off of interchange versus how much are they making off the other sorts of fees and services and … what does that do to them in terms of marketing and competitive positioning against the other players in the market," Jackson said.
Green Dot and NetSpend have good reason to want to get higher interchange fees.
Revenue from such fees was $37.7 million in the first quarter for Green Dot, representing 32.1% of the company's operating revenue.
At NetSpend, revenue from interchange was $19.7 million in the first quarter, representing 24.4% of its operating revenue.
Executives at Green Dot and NetSpend declined to discuss what specific changes they would make if they wanted to meet the requirement.
"Green Dot feels good that the exemption was upheld by the Federal Reserve," Steve Streit, the chairman, chief executive and president of the Monrovia, Calif., company, said in an email sent by a spokeswoman. "We will obviously need to spend more time parsing the language to have any definitive comments."
Dan Henry, the CEO of NetSpend, of Austin, Texas, said in an email sent by a spokeswoman that he believes the company qualifies for a separate exemption for debit card issuers with less than $10 billion of assets and "will be able to shift volume as needed among our different issuers to optimize our ability to earn interchange revenue."
Green Dot and NetSpend are not banks but partner with banks that issue their cards on their behalf.
Two of NetSpend's bank partners would qualify for the small issuer exemption, though two others, SunTrust Banks Inc. and U.S. Bancorp, would not.
Neither of Green Dot's bank partners, General Electric Co.'s GE Money and Synovus Financial Corp., qualify for the small issuer exemption, which was intended to protect small banks. However, Green Dot is trying to buy the bank holding company Bonneville Bancorp in Provo, Utah, that would qualify for the exemption. The deal is pending regulatory approval.
