Regulate Prepaid Cards as Debit Cards? Not So Fast

Recent BankThink blog posts by Andrew Kahr and Gadi Dechter and Joe Valenti are among the voices calling for regulating prepaid cards as checking account debit cards. 

The basic argument is that the prepaid card has evolved to be almost indistinguishable from checking accounts. From a functional perspective, that is true.  From a usage perspective, there are vast differences. 

According to a recent report from the Federal Reserve of Philadelphia, the lifespan of a prepaid card is often less than six months, 5% to 15% that of a typical checking account. If one were to compare pro forma costs between general purpose reloadable prepaid cards and basic checking accounts, there would be significant differences from a cost perspective, too.  As my annual reports have exhibited over the last three years, the median annual cost of a prepaid card with direct deposit is $148.50 compared to $244.70 for a basic checking account.

While not as sexy as mobile or social networks when it comes to new banking channels, prepaid cards are a disruptive technology.  As such, it is a natural tendency for entrenched interests to try to fit a competitive offering into an established framework.

But checking account regulations are outdated even for their primary product. For instance, requiring monthly statements to advise the account holder of their balance and transaction history when an electronic fund transfer has occurred is a mid-20th century solution to information availability. Today, checking account holders have instant digital access to all transactions and current available funds. This argument begs the question, why would you want to regulate the prepaid product with a set of archaic rules?

Additionally, if prepaid were to be regulated just like a checking account, would that require funds only be loaded to the card at a state or federally chartered bank?  If so, millions of consumers would lose the convenience of loading their cards at the hundreds of thousands locations that are now available to the consumer.  Currently, there are more load locations than bank branches and, as such, the prepaid card provides competitive superiority to the checking account.

The following protections are commonly afforded to prepaid cardholders, particularly those who purchase the product from an issuer with a banking charter:  

• Zero liability provisions
• Cards receiving federal benefits payments have enhanced Regulation E protections, which the industry has endorsed for all general purpose reloadable prepaid cards
• FDIC insurance is passed through to individual cards

For cards not issued by a bank (e.g. Amex's Bluebird card), state money transmitter laws provide safety and soundness protections. For those that say these protections are insufficient, let us remember the millions of consumers who for decades bought American Express travelers checks.  I do not recall a consumer demand for federal insurance of these funds.
There is still an argument that prepaid cards are for the unbanked and underbanked.  While the prepaid card has allowed these groups to have safe access to payments networks, the card has evolved as an alternative for traditionally banked consumers to meet a variety of needs, including budgeting and providing funds to their children.  Imposing a "one size fits all" set of regulations on this product in essence, forces it to be the same as a checking account.  If the checking account were a panacea, then prepaid cards would not have arisen to fill a void in the market.

Prepaid cards, however, should not operate in a "Wild West" fashion. Rather, these products and traditional checking account products must be analyzed and regulated in light of their specific attributes.  Current checking account regulations must be rationalized given today's disruptive technologies and the prospect that the rate of technological change is increasing exponentially.  One size does not fit all!

Michael Flores is CEO of Bretton Woods, Inc. and has researched and written extensively about payments and banking issues. He can be reached at michael.flores@bretton-woods.com.