[Senate Hearing 112-560]
[From the U.S. Government Publishing Office]
S. Hrg. 112-560
EXAMINING ISSUES IN THE PREPAID CARD MARKET
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HEARING
before the
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
ON
EXAMINING ISSUES IN THE PREPAID CARD MARKET
__________
MARCH 14, 2012
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia MARK KIRK, Illinois
JEFF MERKLEY, Oregon JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina
Dwight Fettig, Staff Director
William D. Duhnke, Republican Staff Director
Dawn Ratliff, Chief Clerk
Riker Vermilye, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Financial Institutions and Consumer Protection
SHERROD BROWN, Ohio, Chairman
BOB CORKER, Tennessee, Ranking Republican Member
JACK REED, Rhode Island JERRY MORAN, Kansas
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey MIKE JOHANNS, Nebraska
DANIEL K. AKAKA, Hawaii PATRICK J. TOOMEY, Pennsylvania
JON TESTER, Montana JIM DeMINT, South Carolina
HERB KOHL, Wisconsin DAVID VITTER, Louisiana
JEFF MERKLEY, Oregon
KAY HAGAN, North Carolina
Graham Steele, Subcommittee Staff Director
Michael Bright, Republican Subcommittee Staff Director
Catherine Galicia, Counsel
Beth Zorc, Republican Counsel
(ii)
C O N T E N T S
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WEDNESDAY, MARCH 14, 2012
Page
Opening statement of Chairman Brown.............................. 1
Opening statements, comments, or prepared statements of:
Senator Corker............................................... 2
WITNESSES
Lauren Saunders, Managing Attorney, National Consumer Law Center. 3
Prepared statement........................................... 24
Jennifer Tescher, President and Chief Executive Officer, Center
for Financial Services Innovation.............................. 4
Prepared statement........................................... 30
Daniel R. Henry, Chief Executive Officer, NetSpend Holdings, Inc. 6
Prepared statement........................................... 34
L. Richard Fischer, Partner, Morrison and Foerster............... 8
Prepared statement........................................... 62
David Rothstein, Researcher, Policy Matters Ohio................. 9
Prepared statement........................................... 64
Additional Material Supplied for the Record
Letter submitted by Chairman Sherrod Brown from William E.
Saunders, Chief Executive Officer, Community Choice Financial.. 69
Prepared statement of the Network Branded Prepaid Card
Association.................................................... 72
(iii)
EXAMINING ISSUES IN THE PREPAID CARD MARKET
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WEDNESDAY, MARCH 14, 2012
U.S. Senate,
Subcommittee on Financial Institutions and Consumer
Protection,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee convened at 2:35 p.m., in room SD-538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Subcommittee will come to order.
Thank you, and thanks to the witnesses, all, for being on
time, being seated, even the witnesses that have had a more
difficult time getting here. Ms. Saunders, thank you for that,
and thanks to Senator Corker for always working together well.
I will do a short opening statement, then Senator Corker will
do the same and we will begin the hearing.
The Subcommittee held a hearing in October examining what
more can be done to encourage low- and moderate-income
Americans to save and to build wealth. Today, we are asking
what more can be done to move low- and moderate-income
Americans into financial products, to be among the banked, if
you will.
Prepaid cards are one alternative for lower-income
customers looking to use financial products responsibly. We
know some things about the prepaid market, but there is much we
do not know. We know it is a growing product and a growing
market. According to a Federal Reserve study, the number of
prepaid transactions increased 21 percent per year from 2006 to
2009 and the value of prepaid transactions increased 22 percent
per year over that same period.
We know it is a diverse product. They are used as a
substitute for debit cards to serve as direct deposit vehicles
for employers, to store State unemployment benefits, as is done
in Ohio, and as a method for depositing tax returns. And we
know that this product provides an important service to those
who use it. Studies show that cardholders are using prepaid
cards primarily to purchase staples, primarily for groceries,
food away from home, and purchases at gas stations.
We also know there are challenges associated with prepaid
cards. Like many other financial products, when terms are
clearly disclosed and consumers have complete information
presented simply about the product, they can use them properly,
but it is important consumers understand all the fees
associated with these cards. It is important that consumers
understand that not all products offer the same levels of
protection.
We are here today to learn more about the various prepaid
card products, the consumers who use them, the protections that
are afforded to those consumers.
I thank the panel for joining us.
Senator Corker.
STATEMENT OF SENATOR BOB CORKER
Senator Corker. Thank you, Mr. Chairman, and I thank all of
you for being here today.
I think our goal should be to learn today. I usually do not
make very long opening statements. I look forward to your
testimony. I want to make sure we have sensible regulations
that do not impede innovation, but at the same time, I think
customers should know what they are getting and private
companies should innovate and develop new services.
So, look, I am looking forward to your testimony and
learning a lot about prepaid services and look forward to the
questioning when it occurs. Thank you all for being here.
Chairman Brown. Thank you, Senator Corker.
Senator Corker has a judicial nominee to introduce in a few
moments, so when he leaves, that will be the reason. He is
going to try to return.
Quickly, I will introduce the panel. Lauren Sanders is the
Managing Attorney at the National Consumer Law Center's
Washington office. She handles legislative, administrative, and
other advocacy efforts in our financial services area. She
previously directed the Federal Rights Project of the National
Senior Citizens Law Center, was Deputy Director of Litigation
at Bet Tzedek Legal Services in Los Angeles, was an associate
at the public interest firm Hall and Phillips. Welcome, Ms.
Saunders.
Jennifer Tescher is the President and CEO for the Center
for Financial Services Innovation, which aims to transform the
financial services experience in America in order to better
serve underbanked customers and to help them achieve
prosperity. She founded CFSI in 2004, has achieved notable
success in raising the profile of underbanked access and asset
building as an objective for the industry. She previously
served on the Federal Reserve Board's Consumer Advisory
Council.
Daniel Henry has been CEO of NetSpend Holdings, Inc., since
February 2008. He is a leading provider of reloadable prepaid
debit cards. Prior to joining NetSpend, Mr. Henry cofounded
Euronet Worldwide, a global provider of electronic payment
services. Welcome.
Rick Fischer is a partner at Morrison and Foerster in
Washington, focusing on retail financial services, privacy, and
data security. For some 40 years, he has advised a variety of
companies, including banks and retailers and insurers and
technology companies throughout our country on the full range
of financial services and payment system issues. His practice
has a special emphasis on privacy and data security, e-commerce
technology, and financial services joint ventures. He also
serves as Washington counsel for Visa.
David Rothstein is a researcher at Policy Matters Ohio, an
Ohio-based nonprofit, nonpartisan policy research organization.
He is Project Director for Ohio's Asset Building Coalition,
CASH, which stands for Creating Assets, Savings and Hope. He
researches tax and wage and consumer policy, including the
Earned Income Tax Credit, housing and foreclosure issues, and
consumer protection. He is a Research Fellow for the New
American Foundation and serves on the Board of Managers of the
National Community Tax Coalition.
Welcome to all five of you. If you would begin, Ms.
Saunders. Thank you.
STATEMENT OF LAUREN SAUNDERS, MANAGING ATTORNEY, NATIONAL
CONSUMER LAW CENTER
Ms. Saunders. Thank you. Chairman Brown, Ranking Member
Corker, and Members of the Committee, thank you for the
opportunity to testify today about prepaid cards.
Prepaid cards offer access to modern electronic banking
systems for millions of underbanked consumers. Today, too many
prepaid cards have substandard protections, limited
functionality, and problematic fee structures. But it is too
early to pass definitive judgment on the market as the market
is young and the regulatory structure is still developing.
Here are seven factors to keep in mind as Congress,
regulators, and the industry work to make prepaid cards a safe,
useful, and empowering product for consumers.
First, consumers must have the choice of financial products
and services that meet their needs. Traditional bank accounts
must continue to be available to low-balance customers, and
public agencies must always offer the choice of direct deposit
to an account of a consumer's own choosing before offering a
prepaid card.
Second, consumers must understand the cost and in terms of
their accounts. Fees need to be more prominently displayed, and
we should explore developing a single benchmark like the APR to
help consumers compare different products and understand the
overall cost of the product.
Third, consumer funds must be safe in case of insolvency of
any party involved with the card. FDIC or credit union
insurance should be required. Exceptions for nonbank uninsured
cards, like the American Express card, should be permitted, if
at all, only for very limited balance cards that function more
like gift cards.
Fourth, consumers need protection from errors, unauthorized
charges, and disputes. All prepaid cards should be covered by
Regulation E directly and not merely as a matter of contract or
voluntarily. And cards should also come with charge-back rights
in case of merchant disputes, as with credit cards.
Fifth, consumers need ample, free, and convenient access to
account information and customer service. Consumers should be
encouraged to know their balance, review their statements for
unwanted fees, errors, and unauthorized charges, and ask
questions and resolve issues with their accounts. Yet prepaid
cards can charge fees that deter access to this information.
Consumers who may not have Internet access are expected to
monitor accounts online and may not even have the choice of
paper statements. Prepaid cards should not be a black box in
the customer's wallet.
Sixth, prepaid cards must not have unfair fees or tricks
and traps. Purchase and monthly fees are the price of the
product, but a long list of other fees makes the card hard to
price or compare and leads to customer confusion. And in
particular, some types of fees are problematic and need
regulatory attention. Penalty and information fees should be
eliminated whenever possible.
Seventh, it is essential that overdraft fees and embedded
credit features be eliminated from prepaid cards. Overdraft
fees and trouble managing credit are what have driven many
consumers out of bank accounts. The very name ``prepaid card''
should mean what it says. Indeed, ``you cannot spend more than
you have'' is a common marketing refrain for prepaid cards.
Prepaid cards with credit features can permit payday lenders to
piggyback on bank preemption to make loans in States where the
loans are illegal. Senator Brown, in your own State of Ohio,
the payday lender CheckSmart is using a prepaid card to evade
the State's usury cap.
Congress banned overdraft fees as a condition of the
prepaid card exemption from the interchange fee cap, but
smaller banks are exempt. The Treasury Department banned credit
on cards that accept direct deposit of Federal payments, but
the rule does not apply to every card. Banning overdraft fees
and other embedded credit features on all prepaid cards would
prevent deceptive practices and confusion and help make the
cards a safe, genuine, alternative to bank accounts, deserving
of higher interchange fees.
The good news is that things are generally moving in the
right direction. Fees have been coming down. Voluntary
protection is becoming more widespread. But we are not there
yet. Congress and regulators can help by leveling the playing
field with strong minimum standards to bring prepaid cards into
the financial mainstream and out of the shadow banking system
where they are today.
Thank you for this opportunity to testify. I would be happy
to answer your questions.
Chairman Brown. Thank you, Ms. Saunders. I appreciate it.
Ms. Tescher, thank you for joining us.
STATEMENT OF JENNIFER TESCHER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CENTER FOR FINANCIAL SERVICES INNOVATION
Ms. Tescher. Good afternoon, Mr. Chairman and Ranking
Member Corker. Thanks for having me today. I am Jennifer
Tescher. I am the President and CEO of the Center for Financial
Services Innovation. CFSI is a national nonprofit organization
in its eighth year of providing leadership, research, and
insights on the everyday financial needs of financially
underserved consumers.
CFSI has studied the general purpose reloadable prepaid
card market for nearly a decade. We also work with nonprofit
organizations to provide them the information they need to help
their clients use prepaid cards safely and effectively. Last
summer, we convened 19 of the leading prepaid companies and
consumer advocacy organizations to create a forum for a dialog
about what makes for a high-quality prepaid card. The group
dialog has informed the creation of a prepaid quality guide,
which we expect to publish this summer.
Yesterday, we released our recommendations for a
standardized fee box for improving the transparency of prepaid
cards, and three prepaid card providers have committed to adopt
or test CFSI's proposed disclosure box.
CFSI believes that well designed prepaid cards can offer a
critical on ramp to the financial mainstream for underserved
consumers comprised of 30 to 40 million American households.
General purpose reloadable prepaid cards are virtual bank
accounts and they represent a truly new point of financial
access at a time when access overall is diminishing. Prepaid
cards function like electronic bank accounts without checks.
Consumers load funds on the card and, with the majority of
prepaid cards, can spend only what they load. And because
prepaid cards can be loaded only with funds that are
immediately available, they offer immediate liquidity. Anyone
can qualify for a prepaid card regardless of credit history and
they can be conveniently accessed and used.
Prepaid card providers have in recent years begun to add a
broad range of features and functions, including bill payment,
money transfer, savings, and credit building that hold promise
for linking near-term transactions to longer-term asset
building. For instance, at least five prepaid card providers
now offer customers high-yield savings accounts linked to their
cards.
In 2008, CFSI worked with researchers at the University of
Washington to conduct in-depth interviews with two dozen
prepaid card users to understand why they were choosing prepaid
cards, how they were using them, and how they perceived the
product. Most consumers in the study had low or moderate
incomes and substantial personal debt. All but one interviewee
had used checking or savings accounts before starting to use
prepaid, and a majority had opened bank accounts as
adolescents. But by the time they were interviewed, 14 had no
conventional bank account. Most either had closed their
accounts or had their accounts closed by the banks.
Overdraft fees were a common complaint. Some felt their
bank chose to honor one big check in order to allow several
smaller checks to bounce, each one incurring a costly overdraft
fee. Some consumers said they simply could not understand
banks' fee structures.
Customers did not hold themselves harmless in disputes with
banks. One mentioned a gambling addiction and others considered
themselves to be bad money managers. But the way their banks
handled or ignored their problems left them mistrustful.
The results of our research suggested six elements of the
prepaid card experience that customers valued: Convenience,
accessibility and inclusion, immediate liquidity, simplicity
and transparency, value, and built-in discipline.
It is important to acknowledge that not all prepaid
products are created equal and there had been some that had
been poorly structured, outrageously priced, and a bad deal for
consumers. On balance, however, the accessibility, simplicity,
convenience, and value that most prepaid cards provide make
them a promising product for everyday consumers. To ensure
prepaid lives up to that promise, it is critical that we do
more to ensure that they provide a safe and robust experience.
CFSI recommends mandating FDIC pass-through insurance,
extending Regulation E as it is applied to payroll cards, and
requiring a standardized fee disclosure box. While most prepaid
companies have taken some steps to make it easier for consumers
to find and understand the fees associated with their products,
an examination of current prepaid fee disclosure practices
shows that there is a need for improvement.
CFSI has designed a model fee disclosure box and three
prepaid card providers, Green Dot, Plastyc, and Ready Credit,
have committed to adopt or test it. Ultimately, any model fee
box adopted by regulators should be based on consumer and
industry research, cost-benefit analysis, and consumer testing.
In conclusion, prepaid cards hold great promise for
improving the manner in which tens of millions of American
households conduct their financial activities.
Thanks, and I look forward to your questions.
Chairman Brown. Thank you, Ms. Tescher.
Mr. Henry.
STATEMENT OF DANIEL R. HENRY, CHIEF EXECUTIVE OFFICER, NETSPEND
HOLDINGS, INC.
Mr. Henry. Thank you. Mr. Chairman, Ranking Member Corker,
thank you for the opportunity to appear before you today. I
testify today not only on behalf of NetSpend as the CEO, but
also on our 2.1 million cardholders. Forty-four thousand of
them reside in Ohio. Thirty-one thousand of them reside in
Tennessee.
NetSpend is one of the Nation's leading providers of
general purpose reloadable prepaid debit cards for unbanked
consumers. Our mission is to empower consumers with the
convenience, security, and freedom to be self-banked. We are
proud of what we do and committed to collaborate with policy
makers, regulators, advocates, and our industry peers to
promote a clear and effective regulatory framework for our
industry and the consumers we serve.
According to the FDIC, there are 60 million underbanked
consumers in the United States. Why is that? Well, most
traditional banks and their products and fee structures really
are not designed for low-income consumers who typically
maintain very low average balances. It may surprise you to hear
that of NetSpend's 2.1 million active cardholders, more than
3,000 of these cardholders are employees of Bank of America,
Chase, or CitiBank. Our customers are typically working
Americans who want control, security, and convenience, and who
have not had good experience with banks. They are people who
deserve the same quality of financial services as the more
affluent customers of traditional banks enjoy.
The reason we have our customers is because we provide them
with a better solution designed to meet their unique financial
service needs. Bear in mind the NetSpend card, like the similar
products of our competitors, is a bank account. It is FDIC
insured on a pass-through basis, subject to the same consumer
protections and compliance requirements as a checking account,
provides access to a host of financial services, including
flexible fee plans, 5 percent on your savings, free person-to-
person account transfers, free direct deposit of payroll and
benefits, bill payment services, real-time account alerts to
let consumers always know how much money they have, more than
100,000 brick-and-mortar locations where consumers can add
funds to their card accounts, and a host of financial literacy
and budgeting tools.
We have also developed what we believe is a very consumer-
friendly overdraft program that includes buffers and a grace
period that result in most overdraft transactions avoiding any
fee whatsoever. And when fees are charged, they are less than
half of what most banks and credit unions charge.
So our product is a bank account, but one which we have
stripped out the real estate and personnel cost of bank
branches. We have leveraged the infrastructure of nonbank
retailers to reach underbanked consumers, leveraged technology
to build a product platform and network that provides these
customers with utility, security, dignity, and access they have
never had before. Reloadable prepaid products are better and
cheaper than the alternatives.
Just this week, Bretton Woods released a new study of
reloadable prepaid cards that showed the following. Consumers
who use a reloadable prepaid card with direct deposit have an
average cost savings of 40 percent versus a low-balance
checking account. Consumers who switch from cash to a
reloadable prepaid card have an average cost savings of 56
percent. Due to fierce competition, the prices of reloadable
prepaid cards are trending down, while in the aftermath of
interchange fee caps and other transfers, the price of low-
balance checking accounts are trending up.
The Bretton--bless you. The Bretton Woods study also
reminds us that many of the consumers we try to serve no longer
have access to checking accounts because they are among the 19
percent of U.S. adults who cannot qualify for an account
because they are in the ChexSystems or TeleCheck's data base.
There is sometimes a perception that the prepaid industry
is unregulated when, in fact, we and our products are highly
regulated at both the Federal and State levels, through both
the regulation of our issuing bank and through direct
regulation of us. We at NetSpend welcome efforts to eliminate
any ambiguity about what rules apply to our business and our
industry. We have appreciated our direct engagement with the
extremely capable staff of the new Consumer Financial
Protection Bureau as they work to learn more about our industry
and the customers we serve.
We believe it is very important that we maintain ground
rules in a way that enhance consumers freedom of choice rather
than limiting it. We are all committed to developing more
effective ways to communicate with our customers about the
fees, terms, and conditions of our products. But limitations on
the products, such as restrictions on the types of fees that
can be charged, will only harm consumers. I believe those of us
who serve the low-income population in the United States have a
higher standard to which to adhere. To truly serve this
customer, we need to be allowed to compete on a level playing
field with the traditional bank products that have failed these
people. We believe price controls and prohibitions will only
limit choice and stifle innovation.
We look forward to working with policy makers, regulators,
and advocates to facilitate the development of financial
service products that serve the unbanked Americans who have
largely been left behind by traditional banking products. Thank
you.
Chairman Brown. Thank you, Mr. Henry.
Mr. Fischer.
STATEMENT OF L. RICHARD FISCHER, PARTNER, MORRISON AND FOERSTER
Mr. Fischer. Thank you. Chairman Brown and Ranking Member
Corker, my name is Rick Fischer and I am partner at the law
firm of Morrison and Foerster. As you indicated, Chairman
Brown, I do do work for Visa, but today I am here on my own
behalf and not testifying on behalf of Visa.
The essence of my testimony is that legislative action on
prepaid cards is not necessary. I believe that the structure
and oversight of the prepaid card market is currently
sufficient and that any perceived deficiencies can effectively
be addressed by the new Consumer Financial Protection Bureau.
As you have heard, prepaid cards are an innovative product.
I think that is generally accepted. They provide substantial
benefits to consumers, but they also provide benefits to
employers and Government agencies, among others.
Although prepaid cards represent only a small part of the
payment card market, it is growing rapidly. You have heard
that, as well. In fact, according to the Federal Reserve Board,
it is the fastest growing segment of the payment card market.
You have also heard the prepaid card functions like
checking accounts. However, it is at a significantly lower
cost. Consumers can load funds and use them in a variety of
ways, and they can use them like credit cards and debit cards
throughout the country, and, in fact, outside the country, as
well, in many cases.
Prepaid cards are an attractive, cost-effective payment
option for consumers with less than perfect credit. It also
assists unbanked consumers function in an increasingly noncash
world.
But I want to emphasize that it is not only the credit-
impaired or the unbanked consumers that benefit through prepaid
cards. Many consumers use them to help them control their
budgeting. Others use them to protect their deposit accounts
from fraud in the event of a data breach, since it is only the
funds in the prepaid card and not the funds in the deposit
account that would be accessed. So it is no wonder that this is
a fast-growing segment of the market.
With the growth of prepaid cards, both State and Federal
rules are evolving to address prepaid practices. In addition,
payment system rules, like the Visa rules, also enable
consumers to dispute transactions through chargebacks. You
heard from Ms. Saunders that the desirability of that, it is
very important and it is available today on branded cards.
Similarly, the system rules protect consumers from unauthorized
use of payment cards, just like any other branded cards. And in
addition, all prepaid cards at financial institutions, the
funds held at financial institutions are currently protected by
FDIC insurance.
In terms of consumer protections, the Card Act in 2009
provided additional protections for gift cards and other
prepaid cards. The Federal Reserve Board has extended
Regulation E to payroll cards and many Government benefit
cards, Social Security payment cards, for example.
But at that time, the Federal Reserve Board indicated
exactly what Ms. Saunders said. It is a developing market, it
is a new market, and they are going to take it slow in terms of
regulations, but they would monitor the market to see when new
regulations are required. This responsibility now resides with
the Consumer Financial Protection Bureau. More specifically,
the Bureau has the authority to regulate all consumer financial
products and services. With respect to prepaid cards, as I
indicated, they have inherited the authority of the Federal
Reserve Board to apply Regulation E, including its disclosure
and error resolution requirements, to other types of prepaid
cards. The authority is there and it can be used. The Bureau
can determine whether additional consumer protections should be
proposed under Regulation E, and the Bureau has made it quite
clear that it intends to review prepaid card fees, disclosures,
and practices, and that this is one of its priorities.
Congress created the Consumer Financial Protection Bureau
and directed the Bureau to oversee a fair market for consumer
services. The authority vested in Congress in the Bureau is
sufficient to address any additional consumer protections
needed for prepaid cards. The Bureau has announced its
intention to review prepaid card practices, and the Bureau
should be given the opportunity to do so.
Thank you for the opportunity to be here today and I would
be happy to answer any questions.
Chairman Brown. Thank you very much, Mr. Fischer.
Mr. Rothstein, welcome.
STATEMENT OF DAVID ROTHSTEIN, RESEARCHER, POLICY MATTERS OHIO
Mr. Rothstein. Good afternoon, Chairman Brown, Ranking
Member Corker. Thank you for giving me the opportunity to
testify on behalf of Policy Matters Ohio and the New America
Foundation.
My testimony today is based upon the following three
premises. Low- and moderate-income families need and deserve
full transparency and disclosure of fees associated with
prepaid debt cards. Prepaid debit cards, particularly cards
with public benefits and tax returns loaded onto them, should
not have features that add high fees, such as overdraft charges
and balance inquiry. And finally, the prepaid card market
should not be a replacement but rather a complement to other
financial products that build and manage assets for working
families.
As you have heard, millions of low- and moderate-income
families use prepaid debit cards for their day-to-day
purchases, but my testimony today focuses on those who receive
them for public benefits, such as unemployment compensation,
food assistance, and State tax refunds. These families are
particularly financially vulnerable, so protecting and growing
their assets is especially important.
Government or public sector cards paid for with public
dollars used to provide unemployment compensation and other
benefits, and ensuring that these dollars are not siphoned off
by unnecessary fees should be a top priority.
While I represent the viewpoint of many consumers
nationwide, I can also provide an on-the-ground perspective
about the prepaid debit cards that are used for unemployment
compensation in Ohio. In 2011, more than half-a-million Ohioans
received unemployment compensation, bringing $3.3 billion to
Ohio's families. They have two choices in Ohio for their
unemployment compensation. One is through direct deposit into a
bank account and the second is through an electronically loaded
debit card called the ReliaCard, a prepaid Visa card provided
by U.S. Bank.
The ReliaCard is used in other States, as well, and has
several advantages over paper checks, which are no longer an
option in Ohio. First, the ReliaCard allows recipients without
bank accounts to receive compensation and not pay to cash a
check. Second, the ReliaCard allows recipients to make
electronic purchases and bill payments, unlike a cash or check
option. Third, the card requires a code and is harder to steal
than cash or a check. And finally, recipients get their
benefits several days sooner.
We began to research this card in depth because our
colleagues in housing and tax preparation assistance alerted us
that individuals receiving unemployment compensation were
actually overdrafting on their benefits.
The ReliaCard is convenient for many users. However, it
also can carry some fees for withdrawal and overall use. I have
attached a table to my testimony. U.S. Bank charges $1.50 for
withdrawing money at non-U.S. Bank locations or ATMs that are
not part of the Visa PLUS ATM network. There are other fees
that the ATM might charge, as well. There are fees for balance
inquiries at non-U.S. Bank locations. The ReliaCard also has
overdraft fees at $17 for purchases that exceed the value on
the card if they opt for coverage. However, this fee is likely
to be dropped this July due to the Durbin Amendment on
interchange fee rules. It is important to note that ATM and
overdraft fees can add up, incurring multiple charges in a day
or week, for many clients who are still operating in a cash
economy.
The ReliaCard definitely has some positive components to
its fee structures. There are no fees for point-of-sale
transactions, so the card can be used anywhere that accepts
Visa. Card users can purchase above the price of transaction
and receive cash back for no additional charge from most
merchants. There is no bank transfer fee or penalty for moving
funds from the ReliaCard to a bank account. Balance inquiries
are also free at a U.S. Bank or Visa PLUS ATM location, which
allows clients to better manage their finances. Several other
features on the card include free customer service inquiries,
paper statements, and replacement of lost or stolen cards.
Other public sector debit cards might charge for these items.
In addition to concern about fees, there are reasons to be
concerned about access to U.S. Bank and free network locations.
There are approximately 750 ATMs in the Ohio network. However,
not all of Ohio's 88 counties have one of these covered
locations. In fact, our map showed that 33 counties have no
U.S. Bank locations and 16 counties have no Visa PLUS ATM
locations. Many of the nonurban counties in Ohio have few
locations, and often one free location every 20 miles. We have
attached the maps of unemployment rates and the ReliaCard
coverage to this testimony to give you a better picture. Some
of the areas with highest unemployment rates have the fewest
locations.
Also of concern is that it was extremely difficult for
Policy Matters in doing this research to find the ATM network
and locations. We, in fact, had to do a public records request
to get the full list.
Given my time, I just wanted to also highlight, it is
imperative that the prepaid cards are not a substitute for
savings accounts or mainstream financial products. This is a
growing concern in the consumer community.
There are huge policy implications if prepaid cards become
the new norm for clients and a second-tier banking account of
sorts, and I am again grateful to provide testimony and happy
to answer questions.
Chairman Brown. Thank you, Mr. Rothstein, and thank you all
for the testimony from every single one of you, especially the
``Gesundheit'' from Mr. Henry, something unprecedented in
Senate hearings. Thank you for the--that was a really classy
move. He said you were ambidextrous, is the word he used, or
versatile or something, so----
Senator Corker. We had George Clooney in earlier today, but
you clearly outdid him.
[Laughter.]
Chairman Brown. Before going on, I ask unanimous consent
the written statement of the Network Branded Prepaid Card
Association be included in the hearing record. Thank you. With
no objection, so ordered.
Mr. Fischer, I will start with you. You said something I
thought maybe sets the context. You, I believe, were saying
that we, at least now, do not need to do anything legislatively
but should let the CFPB move forward in its efforts. Do any of
you disagree with that, that we let Administrator Cordray and
that Bureau put rules out and deal with some of these things?
Maybe it would include a model disclosure, like Ms. Tescher
said, and a whole set of other things on overdrafts and fee
rules and all that. Would you want to start, Ms. Saunders, your
thoughts on letting that process work, as opposed to Senator
Menendez's bill, which we will talk about in a moment, perhaps.
Ms. Saunders. Sure. Well, we support Senator Menendez's
bill, and if the Senate chose to act on that, we would support
it. But we also do believe that the CFPB has most of the
authority that it needs and it can address most of what I
talked about. There may be a couple little details that would
be a little harder, but for the most part, I think the CFPB can
address the issues, as well.
Chairman Brown. Ms. Tescher.
Ms. Tescher. I would agree, also, that the CFPB has the
authority it needs, and I have been really pleased to see that
they are taking a very data-focused approach, research-focused
approach, to figuring out how to write rules in this area.
Chairman Brown. Mr. Henry.
Mr. Henry. I would echo. I think that they have plenty of
the authority, and I have had numerous meetings with
representatives from the CFPB and have been very impressed with
their pragmatic approach, their industry experience, and the
way--the questions they are asking and the way they are going
about things. So, so far, I can say I am optimistic with what I
see there.
Chairman Brown. Mr. Rothstein, your comments on what Mr.
Fischer said.
Mr. Rothstein. Mr. Chairman, I would generally agree with
the panel. I would say that there is one issue particularly
related to the testimony that I gave. There is a little bit of
murkiness between Federal and State public sector cards that
might not be able to be addressed by the CFPB. But, in general,
I definitely agree with that.
Chairman Brown. Thank you. Ms. Tescher, you said that these
prepaid cards can, you used the term ``on ramp'' to becoming
banked, or to being part of the banking system. How do you
envision that? Are we on that ramp now? Are we likely to fall
off or not get on that ramp because of some nonbanks that might
be doing some things that you talked about, usury laws in Ohio
and some of those issues? Tell us what you think about that.
Ms. Tescher. So, I think, going back to the CFPB comment,
the benefit that allowing the CFPB to act has is they are now
empowered to regulate both banks and nonbanks at the product
level as opposed to the institution, you know, taking a purely
institution-type approach. And so I think that any disparities
in terms of the playing field between those two sets of actors,
there are hopes of leveling it with CFPB action.
I do think the right question to be asking, though, today
is if someone has a prepaid card, are they still unbanked? And
I would say that as prepaid cards increase in their
functionality, as we add the kind of consumer protections that
I think most of us on this panel are calling for, I would
suggest that they become equivalent to each other. At the end
of the day, a prepaid card is a bank account. It is issued by a
bank. I think the biggest difference is how the card is being
distributed. So I think there is a lot of room for products
that are manufactured by banks and that have the appropriate
consumer protections in place, but that are distributed by a
wide range of other providers, be they retailers, nonprofits,
et cetera.
Chairman Brown. Mr. Henry, would you consider your
customers who have prepaid cards, would you consider them in
the banking system?
Mr. Henry. Absolutely. Absolutely.
Chairman Brown. In every case?
Mr. Henry. Every case. Yes. These are bank-issued, FDIC-
insured, Visa or Master Card branded debit cards. They are
banking products. The funds on these cards reside in a
federally regulated institution. And I would like to add some
points----
Chairman Brown. Well, let me follow up on that and then add
the points. Would you say your competitors who offer, or
anybody else that offers these prepaid cards, would you say all
of them are in the banking system, too?
Mr. Henry. There are a lot of players out there, so I
hesitate to say all of them. But the vast majority of the
consumers who pick up these cards, sign up for direct deposit,
the majority of those customers are in the handful of players
in the space, ourselves and three or four others, and all of
those have cards that are issued by banks, FDIC insurance, and
follow all the Reg E compliance guidelines that we do.
You are seeing--and I think that it is real important for
everyone to realize that--my belief is that banks were designed
to serve consumers with money. The most efficient banks in this
country can serve maybe 5,000 customers per retail branch, and
those banks need $20 to $30 million of deposits per branch.
NetSpend has two million customers, which means we would need
400 branches to serve two million customers. But with an
average daily balance of around $80, our static deposits might
be enough to support four or five branches.
So the basic business model of retail banking--and it is
not to be a criticism of banks--it just will never, ever be
able to serve this low- to moderate-income consumer in a fee-
friendly, functional-friendly way.
Chairman Brown. What percentage of--and then I will turn it
to Senator Corker--what percentage of your revenues are from
overdraft fees?
Mr. Henry. A very small percentage. On our overdraft
product, I think it is real important to note is that overdraft
gets painted with a very broad brush, and the overdraft
programs that are out there typically by banks is a solution we
would never offer. For our customers, our customers receive up
to $10 overdraft free of any fees whatsoever. So they can over-
guard their account by up to $10.
Then they have the ability to opt into our BDOE product, we
call it our Best Darn Overdraft Ever solution, and to opt into
that, they must be on direct deposit, they must have access to
email and/or wireless alerts. Those alerts, we send them a
message anytime there is any activity on their account, so they
always know their balance to the penny. Also with our overdraft
solution, they can never dig themselves a hole greater than
$100. If they overdraft, they obviously get a text message to
their phone or an email to their computer saying they have
overdraft and that they have 24 hours to cure that overdraft.
And if they cure it, there is no fee or penalty whatsoever.
That is why more than 61 percent of our overdrafts occur
without any fee or penalty at all. If they do pay a penalty, it
is only $15, which is less than half of the national average of
what banks and credit unions charge for overdraft.
Yes, it is called overdraft, but for us, we have created
what we believe is an emergency pool of money for this consumer
so that they can get access to $20, $30, $40 worth of food or
gas or medicine until their next pay period, and we get
comments from customers time and time again how much they
appreciate that product, and our surveys show that our most
satisfied customers are the ones who have enrolled in and take
advantage of our overdraft program.
Chairman Brown. Interesting, and I will yield to Senator
Corker, but I have more questions.
Senator Corker. Thank you, Mr. Chairman. I am going to
leave in about 60 seconds, but I will come back if you are
still going. I think this has been a very interesting hearing
and I appreciate you calling it.
I am sitting here thinking I am a caveman because I do not
have a prepaid card with all the----
[Laughter.]
Senator Corker. ----with all the benefits that do exist.
One of you mentioned, Ms. Saunders or Ms. Tescher, that
overall access is diminishing. I think it was Ms. Tescher. What
is driving that right now?
Ms. Tescher. I think Dan started to talk about it, that
there have been a number of changes as we have sought to re-
regulate the financial services industry, changes to
interchange, changes to overdraft, that have put significant
new revenue pressures on banks.
Senator Corker. The Durbin Amendment is really, I mean, in
fairness, caused a lot of people to be out of the system, is
that correct, or having to pay higher fees to be in it?
Ms. Tescher. I think it is a variety of factors. I do not
think it is just any single one factor. And I think that the
economics of banking had been under pressure for quite some
time, if you think about it. It was really--free checking was
not free. It was being subsidized largely by low-income
consumers who had the greatest share of overdraft fees.
Senator Corker. Yes.
Ms. Tescher. And when that revenue went away, all of a
sudden, banks were not really in a position to offer ``free''
anymore. So I think you are seeing banks start to reprice and
restructure their accounts in a way that, frankly, just will
not be of enough value, I think, to many consumers. I do not
think a lot of banks are actively kicking consumers out. I
think consumers are voting with their feet.
Senator Corker. Yes, just because of the higher fees that
are----
Ms. Tescher. In part----
Senator Corker. They are more transparent now.
Ms. Tescher. When something is free, if it does not give
you much value, you might use it anyway because it is free.
Senator Corker. Right.
Ms. Tescher. But when it is $15 and you are not getting
much value, well, maybe no thank you.
Senator Corker. Yes. Mr. Henry, who is your regulator?
Mr. Henry. I would like to know. I mean, we are----
Senator Corker. But you mentioned you are regulated. Surely
you know when they come in.
Mr. Henry. I am sorry. Please, no disrespect. I apologize.
One of the reasons I am quite supportive of the CFPB is I would
rather have one known Federal organization that is my regulator
as opposed to five or six that may or may not be my regulator.
FDIC, OCC, indirectly, in terms of regulating our sponsor
banks, FinCEN. We also have State money transfer licenses in
numerous States, so many of the State money transfer agencies
are regulators. So there is a significant amount of regulation
that we adhere to.
Senator Corker. Listen, if it is closed when I come back,
we will offer some written questions, but I really do believe
this has been a great hearing and I thank all of you for being
here and your testimony. Mr. Chairman, thank you for letting me
participate.
Chairman Brown. Thank you for your comments. Thank you.
Thanks, Senator Corker.
Ms. Saunders, you spoke of usury laws on Ohio. One thing
you said that I thought was interesting juxtaposed to Mr.
Henry's comments were that you said in your testimony that a
number of--what drives many people into these accounts and into
the prepaid card is that they have had trouble managing with
all the overdraft fees they have gotten in checking accounts,
and a very different picture from Mr. Henry's painting of how
they do these overdraft fees, you know, the larger check first,
then the smaller, and we know how that has happened.
Talk to me about what you said about evading Ohio usury
laws, and then, Mr. Rothstein, I would like to hear your
comments on her comments, if you would.
Ms. Saunders. Well, in terms of evading State usury laws,
banks, of course, national banks in particular, but typically
State banks, as well, are not subject to them. So if a loan is
made by a bank, it is not covered by payday loan laws. Prepaid
cards, as we have heard discussed, are typically issued by a
bank even if there is a nonbank, like NetSpend, involved in the
picture. Payday lender CheckSmart has developed a prepaid card
issued by Urban Trust Bank in Florida and they offer a credit--
two different credit features on that card. One is styled as
overdraft and the other is more an account advance type of
product well in excess of the State's usury cap, but I think
they believe that because the card is issued by a bank, that
they are exempt from State laws. You know, whether that is
actually true and who is charging the fee and making the loan
is sort of a complicated question.
Chairman Brown. Mr. Rothstein, your thoughts about this. I
assume you are aware of what she is talking about.
Mr. Rothstein. Mr. Chairman, yes. The payday model in Ohio,
as I am sure you have followed, has switched since 2008 when
the new State usury law was passed for payday loans and----
Chairman Brown. Passed on a ballot issue.
Mr. Rothstein. Passed on a ballot issue----
Chairman Brown. Or initially.
Mr. Rothstein. Yes. The function of what Ms. Saunders is
touching on is exactly true. There are also lenders that are
using a Second Mortgage Act in Ohio to make loans, and again,
this--and there are also--a third way they are doing it is also
making loans that are payday loans under the Credit Service
Organization Act, which is they are acting as--they are
applying for a credit service exception which is generally an
act that was for groups that help people who are in sort of
debt trouble and they would help them improve their credit
score, which obviously there is some--a lot of groups have
taken exception to that. They are not credit service
organizations. So there are about three different ways right
now that they are sort of evading the new statute for payday
loans and one of the ones Ms. Saunders touched on, yes.
Chairman Brown. Ms. Saunders, continuing this discussion,
the on ramp that--I do not know why I like that term so much,
but the on ramp that Ms. Tescher mentioned, CheckSmart and use
through this Florida bank, is the card that they provide an on
ramp to the banking system?
Ms. Tescher. No, I do not believe so. I believe that the
primary purpose of the card is to evade State laws. And, in
fact, CheckSmart developed the card originally to circumvent
Arizona's payday loan laws. When Arizona's usury cap kicked in,
I believe, in 2010, that is when they came out with this card
as a way of evading State laws. So I do not think this is a
card that is designed for the purpose of bringing people into
the mainstream. It is designed for the purpose of being a
vehicle to avoid State laws.
Chairman Brown. Could you contrast for Mr. Henry some
comments about his card, that he makes a very strong case for
his card, that his customers are in the banking system the way
that we want people to be in it--could you make that contrast
with what is happening in Ohio with what you contend is a
violation of the usury law, whether it is CheckSmart or other,
I do not care which company for this purpose, but could you
make a contrast on what they do and what he does, as qualified
as you are to speak about what he does based on--and he can
comment, too, but could you make that contrast? Or maybe, Mr.
Henry, you could help with that, too, if you know.
Ms. Saunders. Yes.
Chairman Brown. Maybe even Mr. Henry, taking one of your
competitors, maybe not necessarily by name, and contrasting how
bad it can be and how good it can be with yours, but start with
Ms. Saunders and anybody else can comment on that.
Ms. Saunders. Well, although we may have some difference of
opinion about the overdraft feature on the NetSpend cards, I
would never say that the purpose of the NetSpend cards is
purely to be a vehicle for overdraft or for credit. I think the
purpose of the NetSpend card is to provide a useful product to
people to make transactions, and I really do not disagree with
most of what Mr. Henry said.
On the overdraft side of things, we just do not believe
that credit and an asset account should really be mixed in the
same product. And when you do that, what happens is when you
overdraft, the loan gets paid first before you pay food or rent
or necessities, and even with some limits, like on the NetSpend
card--which is certainly a better policy than most banks, I
would certainly give him that--but I think you can end up
having $45 a month in overdraft fees just added to your monthly
expenses for consumers who really cannot afford that.
So I think it is better to keep credit on its own as a
separate product. We can have the conversation about what are
appropriate small loans. But mixing it with the asset account,
we think just endangers the money that people need first for
food and rent. When people are acting on very thin margins, you
give them fast and easy credit, they will take it because they
are desperate, but then the following month, they will find
they are just a little bit further behind.
Chairman Brown. Mr. Henry, what do some of your competitors
that--again, without naming them, you certainly could or could
not, either way--what do some of your competitors do that you
would not consider particularly ethical in this business that
regulation has not stopped them from doing, things that you do
much more ethically and better?
Mr. Henry. Mr. Chairman, I would like to first start by
reminding everybody that it is my strong opinion that what we
have here is we have bank accounts, so we keep talking about
the prepaid card as though it is a separate and distinct
animal. It is a bank account. And so I think it is, again, real
important to remind ourselves that we are dealing with a card
that is issued from a regulated institution that has full
oversight. Everything that we do in terms of marketing
materials that we send out to customers, everything has to be
approved by our issuing sponsor bank and many times by their
regulator. I want to make sure we have that out there.
In terms of me trying to identify other players in the
market that are not as--in terms of the way they operate,
honestly speaking, there are--our biggest competitor that I see
is ignorance and lack of awareness of this alternative. The
reason why tens of millions of consumers in this country are
trapped in cash is because it works for them and they really do
not have an alternative. There are second and third generations
of consumers in this country who, they saw their mom get their
check, go to a check casher, cash it, get on a bus, go pay the
bills. That is the way it is. That is the way it works. When
Social Security checks go away a year from now, I am going to
be thrilled because we are going to see the Federal Government
is going to be really making proper steps to push the consumer
out of the cash-based world into electronic payments.
And going back to my earlier point, traditional retail
banks by their business model are not set to serve this low-
income consumer with a low-cost model. Do you want to know why
we can do free person-to-person transfers? Because we have a
low-cost model. What will cost you $15 if you go to a money
transfer agent to send money across town, we can do for you for
free. Why are we able to offer an overdraft program that is way
less than half, probably--if you count in all the free
overdrafts we provide, it is probably 10 or 15 percent of what
the costs a bank charges--because we are a low-cost provider.
And, Ms. Saunders, I have really enjoyed getting to know
you over the years because I think we have--I have learned that
we are really going after the same objective, is to serve this
consumer. And the reason why I want to say we are a bank
account is if we can do money transfers for free and if we can
do overdraft for 10 percent of the cost of a traditional bank,
what do you think we can do with small-dollar loans when we get
the chance?
And this consumer is very savvy, OK. Time after time when
we do focus groups on this customer, we ask them, why do you
have this card? A friend or family member told them about it.
Word of mouth is the most forceful advertising in this space.
And that is why you will see that the vast majority of
consumers who picked up this card and really committed to it,
they are committed to a card that has great disclosure, very
fee friendly, and is an on ramp to traditional financial
services. I truly believe in the free market and I believe that
this freedom of choice and this innovation that is taking place
is what can help all of us get this consumer that we all want
to serve out of the very, very expensive world of cash and into
electronic payments.
Chairman Brown. Thank you.
Mr. Fischer, and then I will turn to Senator Corker. Yes.
Mr. Fischer. Just a couple of quick points. First of all,
most branded prepaid cards are, as you have heard--first of
all, they are all bank issued. They are all FDIC insured. And
the vast majority of them are deposit account only. In other
words, there is no lending feature.
Number two, there are many large banks, even if there are
many large banks that are customers of NetSpend, there are
still large banks that offer a very similar product, and one of
the good things about disclosure is consumers can choose among
those products.
Finally, there is nothing wrong in and of itself with the
combination of deposit and credit. Many of us, probably most of
us have deposit accounts that have a feature which is a credit
feature when we overdraft, not overdraft in a fee standpoint,
but we have lines of credit, and there is nothing wrong with
that. The key is whether they are offered in a fair and
undeceptive way, and that is one of the reasons, I think, that
the Consumer Financial Protection Bureau can be helpful in a
context like that. They do not have to talk about generalities.
They can talk about specifics and specific individual companies
to decide whether or not what they are doing with a combination
of prepaid and credit is appropriate or not and make the
decision accordingly.
Chairman Brown. Thank you, Mr. Fischer.
Senator Corker.
Senator Corker. Thank you. I have been watching your body
language, Ms. Saunders, and in your testimony in the beginning,
I think you were concerned about some of the folks that may be
underbanked or unbanked having access to checking services and
all that and these cards not being a total substitute for that.
Tell me what some of your concerns are. In fairness, I will
tell you, I have no experience whatsoever with prepaid cards,
but am very impressed by the testimony today. It seems to me
that they are, in fact, offering multitudes of services that--
more easily done at lesser cost, and yet I sense you may have
some concerns about them sort of taking over all the banking
needs, if you will, of customers and maybe them not having
access to things they ought to have access to.
Ms. Saunders. Right. I mean, I am concerned about banks
neglecting their obligations to serve their entire communities,
including lower-income people in their communities, with the
full range of services. I think prepaid cards today do have a
number of limitations that I think the industry is working to
overcome.
They tend to work pretty well for people who have direct
deposit of their income, of their wages, of their benefits.
They work less well for people who have income from other
sources. It costs money to load cash onto a prepaid card. Most
of them, I do not believe you can load a check onto a NetSpend
card without paying to cash it first. They do not offer paper
checks and some people--correct me if I am wrong, I mean, I
know there are some types of checks out there, but not
everybody can be paid with a card.
And then there is just the larger question of whether you
are developing a relationship that gives you access to other
products, like an auto loan or a credit card. I know that every
time I walk into my bank, which I generally do not do, but if I
happen to need to talk to a person, they always say to me, oh,
by the way, do you need a mortgage?
I think the industry is developing and I think the prepaid
cards are gaining in functionality. I think the lines between
what is a prepaid card and what is a bank account are blurring.
We are seeing banks enter the prepaid card market itself. So I
think this is an evolving conversation. But I think we need to
make sure that we do not just say, this is the only place for
low-income consumers and they cannot also have access to the
full range of services and products that traditional banks
offer.
Senator Corker. I think that is a fair--I will say, it
sometimes seems like it is us here in Washington that are
making it more difficult for some of the lower-income citizens
to have access to credit. I know I supported the credit card
bill that passed in 2009, but I think one of the net negative
effects of that was that a lot of people with lesser credit
ended up not having access to those. It seems to me that much
of what has happened here over the last several years has had a
negative impact on people being able to access those services.
I do not know if you have any comments on that or not.
Ms. Saunders. I think it is a complicated issue. I think
the economy probably has as much to do with people dropping out
of the banking system as other issues. I mean, we did not take
a position on the interchange fee debate. You know, we are a
little concerned about how it is playing out. In particular, we
are concerned about the final regulations issued to implement
the prepaid card exemption from the interchange fee cap. There
was a lot of concern that banks were going to use prepaid cards
to evade the interchange fee cap and so the Fed put some limits
that you cannot, for example, transfer money off of a prepaid
card issued by a large bank onto a savings account and still
get your interchange fee, you know. That is a problem.
Senator Corker. Yes. I had a lot of problems with it, too,
so we are on the same page.
Mr. Henry, I heard you asking sort of about hopefully
having permission over time to be able to make small loans.
Apparently, that is not something you can do now with a prepaid
card, is that correct?
Mr. Henry. You know, we have not developed a product to
know if it is something we can or cannot do----
Senator Corker. So you do not yet know if you can----
Mr. Henry. No, because we will have to get approval from
our issuing bank partner and their regulators to do that. But I
do want to comment. Ms. Saunders, you mentioned about you
cannot load a check onto a prepaid card. We have on our product
roadmap remote deposit capture technology, where a consumer can
take a picture of their check with their mobile phone and then
be able to deposit that check onto the card. And if they can
wait the three or 4 days for that check to clear, we will allow
that to be deposited free of charge.
And I think it is really important to note that already
today, we see more than 40 percent of the interaction that
happens on our Web site in terms of our customers logging into
their account, check their balance, and such--more than 40
percent of that is coming from a smart phone and it is growing
rapidly. I sincerely believe that 2 years from now, we will see
low- to moderate-income consumers almost be completely
penetrated in terms of smart phones, and then the level of
access that that gives these consumers to be able to manage
their accounts, I think, is going to improve dramatically, and
we will be continuing to develop solutions to leverage on that
technology.
Senator Corker. How would you--if you moved, I mean, there
is obviously not much risk in the prepaid card business by
virtue of the way that it works. I mean, it is prepaid. How
would you take customers that you are now attracting by word of
mouth and all of that, how would you end up doing underwriting
for the types of loans you are talking about?
Mr. Henry. May I first comment on there is not much risk?
[Laughter.]
Mr. Henry. We will suffer more than $8 million of losses
this year due to fraud, efficient attacks that happen on our
consumers from fraudsters as well as friendly fire that
happens. We give our----
Senator Corker. And they are fully protected from that
fraud, is that correct?
Mr. Henry. Yes. We----
Senator Corker. The same kind of protection you have with a
credit card or----
Mr. Henry. We give the same sort of protections you have
with your bank-issued debit card, absolutely. And so there is
some risk, yes, sir. But there is not a lot of credit risk.
In terms of how we would go to underwriting such an
account, you know, you could kind of look at it very much like
the small community banks of the past. We are going to know
this customer. We have customers that have been with us--I was
just reading through our testimonies of customers I have
included with our testimony--have been with us since 2002. We
have customers who have been with us, you know, 6, 7, 8, 9, 10
years. We know when they are on direct deposit and we see how
much money they load on the card. We also own and operate our
own processing platform, so we see where they spend. We see
what percentage they spend on gas, food, groceries, and what
have you. And so I believe that we would be in a better
position than any credit card company to be able to make a
judgment in terms of how much credit we can extend to this
consumer.
But again, I want to mention that we have no immediate
plans to provide credit. I have committed to Ms. Saunders that
I will be sitting with her when we have this program and get
her input on it. What I am saying is that that is an example of
innovation that we can step in and fill a void, and just asking
that well-intended legislation and regulation does not thwart
that innovation.
Senator Corker. I would think, if you--let me ask a
question. I guess, obviously, there is a huge business in
sending money back to other countries when people come here to
work and are trying to support families or loved ones in other
places, or maybe people who are here permanently but sending
money to other countries, Cuba and other places, where they are
just trying to help loved ones out. Can you transfer money on
one of these cards, a prepaid card, to another country for
free?
Mr. Henry. If you had a NetSpend card and you were
traveling overseas, I could send you money from my NetSpend
card to your NetSpend account and you would be able to use that
overseas. But all of our cardholders are U.S. citizens. We
issue that card--so we do not issue cards in foreign countries.
I do not know if I answered your question.
Senator Corker. Yes. So if someone was working here and
wanted to send money to a family member in another country and
they were doing that on a monthly basis, which so many people
who work here do, is there a mechanism that you can set up with
these cards to make that happen?
Mr. Henry. That family member would have to be able to
legally get a card issued from our bank here in the United
States.
Senator Corker. The family member in the other country?
Mr. Henry. Yes, that is correct. So--but----
Senator Corker. I see many of your staff may know more
about this than----
Mr. Henry. Yes. I am just giving--told myself to give
myself the opportunity to mention that when we talk about
remittance and money transfer, we naturally think about
international. But if you speak to the two largest providers of
money transfer in this country, they will tell you that their
biggest corridor is domestic United States, many times just
across town. The biggest money transfer corridor is domestic
transfers in this country. When you think about it, you do not
have a bank account. You do not have a checkbook. And you need
to send money to a friend or family member in this country, how
do you do it? You truck on down to a money transfer location,
you pay $15 to $20 to send money, and the recipient has to get
in the car and go pick it up. So, again, this is an example of
what we do in terms of creating product that is uniquely
designed for this low-income consumer and their unique needs.
Another example, you sign up for direct deposit with
NetSpend, you have access to your funds when they post, not
when they settle. So you have a low-income consumer who with
our direct deposit many times gets paid up to 2 days faster
than they would if they waited for their paycheck or with
traditional bank direct deposit. There is not a bank in this
country who would do that. We do that because we recognize the
very unique needs of this low-income consumer.
Senator Corker. Thank you.
Chairman Johnson. Thank you, Senator Corker.
Let me conclude with one question. Ms. Tescher, I just, you
released yesterday your sort of model disclosure box, your
disclosure box. I do not know if all of you had a chance to at
least glance with it. Is that generally the right way to go? Is
that something you would, if you can comment in a few words on
it, and if you are not familiar with it yet, that is fine, too,
but if that is something that you think that the Consumer
Financial Protection Bureau should suggest, should order for
this industry to follow. Ms. Saunders.
Ms. Saunders. We support improved disclosure, including a
fee box, something like what CFSI has proposed. There may be
details we can discuss, but we definitely support the effort--
not as the only measure. Like we said in my testimony, we think
there are some fees that are more problematic, but certainly
more disclosure is a good idea.
Chairman Brown. And the kind of disclosure that she
suggests.
Ms. Saunders. Yes.
Chairman Brown. OK. Ms. Tescher, obviously, you agree with
the box.
[Laughter.]
Ms. Tescher. Yes.
Chairman Brown. Mr. Henry, your thoughts, briefly, about
that.
Mr. Henry. No. We missed the deadline to make the press
release, but we fully intend to test the box. We were in full
support of it.
Chairman Brown. OK. Thanks.
Mr. Fischer.
Mr. Fischer. In the late 1980s, with then-Representative
Schumer, we developed the ``Schumer Box'' for credit cards. I
agree with the concept----
Chairman Brown. It was not your suggestion to name it that,
I hope.
[Laughter.]
Mr. Fischer. Actually, I have only----
Chairman Brown. Senator Corker, not to speak for him, but
we have only been on the Senate for 5-plus years on this
Committee and we have already heard too much talk about that,
frankly, but go ahead.
[Laughter.]
Mr. Fischer. You will be surprised how that came up. Over a
cocktail, sometime, I will tell you how it came up.
Chairman Brown. All right. You are on.
Mr. Fischer. But we will put it this way, that the Senator,
then-Representative, came to that idea very quickly.
[Laughter.]
Chairman Brown. If you had suggested the ``Fischer Box,''
he probably would not have.
[Laughter.]
Mr. Fischer. He did not like that idea, actually. The idea
was--the key fees or the key concepts so the consumers--the box
has been a tremendous success. The one note I saw in the
article, and that is all I have seen, talked about 14 fees.
That is too many. And so the concept, I think it is great, but
the devil is in the details. It has got to be something that
people can use and look at, hit the key things so they can
shop. Fourteen fees is too many.
Chairman Brown. Thank you.
Mr. Rothstein.
Mr. Rothstein. We definitely support the concept and I
definitely agree the devil is in the details. I think one thing
that we would like to see and try to move toward is to take the
box even a step further and say, you know, we have an APR for
measuring and comparing the cost of credit for loans and is
there something that we can do along the same lines for
comparing the cost of prepaid debit cards, given that there are
so many actors out there.
You know, one of the problems, obviously, from the public
sector, Government card perspective, is that you do not really
have a choice unless you get direct deposit of what card you
get. But, yes, we definitely support that idea.
Chairman Brown. Thank you.
Senator Corker. Mr. Chairman, if I could--I know you are
getting ready to close the hearing--I again want to thank the
witnesses and thank you and your staff for causing this to
happen.
I think what I have heard today is there is a lot of
innovation that is taking place in this field. It is evolving.
There is an agency, the Consumer Financial Protection Agency,
that they believe can regulate this accordingly, and I do not
know whether it is because they have watched the way we act
here or whatever. I think they are saying, we do not really
want any Congressional regulation. We think we are in good
shape.
So we look forward to hopefully more testimony down the
road as it evolves and hopefully we will allow it to evolve and
let the agency itself deal with any regulation that needs to
take place. But thank you so much for coming.
Chairman Brown. Senator Corker, thank you, and all five of
you, thank you.
Some Members of the Committee who are not here, or Senator
Corker or I, may have some written questions to you, and if you
would respond to those as quickly as possible. And if you have
any additions that you would like to submit in the record, you
have a week to do that and we would appreciate that.
Thanks for your candor and your good testimony.
The Subcommittee is adjourned.
[Whereupon, at 3:43 p.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF LAUREN SAUNDERS
Managing Attorney, National Consumer Law Center
March 14, 2012
Chairman Brown, Ranking Member Corker, and Members of the
Committee, thank you for the opportunity to testify about prepaid cards
on behalf of the National Consumer Law Center's low-income clients. \1\
The prepaid card market is growing fast and has provided access to
modern electronic payment systems for millions of consumers who have
been shut out of or misused by the traditional banking system. However,
prepaid cards fall into gaps in our consumer protection system and also
present new issues not addressed by our regulatory framework.
---------------------------------------------------------------------------
\1\ Organizational descriptions are attached.
---------------------------------------------------------------------------
Prepaid cards are a relatively new product and are continuing to
develop. There are a number of unknowns, and we should not pass
definitive judgment on the prepaid card market as it exists today.
Currently, too many prepaid cards have substandard protections, limited
functionality, and problematic fee structures. Will they remain a
second tier bank account or will regulators and the industry overcome
those hurdles? Will banks use prepaid cards as an excuse to shed low
balance customers and neglect their obligations to serve their entire
communities? Or will prepaid cards both serve useful functions in their
own right and be a helpful stepping stone to greater financial
inclusion of the unbanked and underbanked?
We do not yet know the answers to these questions. The factors are
complicated, but here are some barometers.
First, consumers must have the choice of payment systems and
financial accounts with a range of functions that meet their needs. The
banking system, and traditional bank accounts, must remain open to low
balance consumers. Prepaid cards are still a very limited product. \2\
For most consumers, a traditional bank or credit union product is still
the best choice. \3\ But many banks have been shedding their less
profitable customers, and they must not use prepaid cards as an excuse
for pushing lower income or credit-impaired consumers out of checking
accounts. Instead, banks must look to the prepaid card world for ideas
about how to safely and efficiently serve these consumers.
---------------------------------------------------------------------------
\2\ For example, prepaid cards work well as a vehicle for
receiving direct deposits, but few, if any, can accept deposits of
paper checks, forcing consumers to continue to use check cashers for
some types of checks. In addition, load fees make cash deposits
uneconomical. Most cannot be used to make payments to persons or
entities that cannot accept cards.
\3\ A common complaint about prepaid cards is that they do not
help consumers build credit, but banks accounts do not either. However,
bank accounts offer many more features and a relationship with an
institution that offers a broader range of products.
---------------------------------------------------------------------------
Public agencies and employers must always give benefit recipients
and employees the choice of direct deposit to an account of their own
choosing before making payments on a prepaid card. That is the law, but
six States are currently failing to offer direct deposit of
unemployment compensation. \4\
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\4\ The Electronic Funds Transfer Act prohibits any person,
including a State, from ``requir[ing] a consumer to establish an
account for receipt of electronic fund transfers with a particular
financial institution as a condition of employment or receipt of a
Government benefit.'' 15 U.S.C. 1693k(2). California, Indiana, Kansas,
Maryland, Nevada, and Wyoming require unemployed workers to have a
prepaid card account with the bank that issues the State card as a
condition of receiving unemployment benefits. Though funds may be
transferred to a private account, there is a delay in receiving the
funds. For more information on unemployment prepaid cards, see National
Consumer Law Center, ``Unemployment Prepaid Cards: States Can Deal
Workers a Winning Hand by Discarding Junk Fees'' (May 2011), available
at http://www.nclc.org/issues/unemployment-compensation-prepaid-
cards.html.
---------------------------------------------------------------------------
For consumers who choose prepaid cards, regulators must be careful
not to relegate prepaid cards to second class status or prevent them
from being an access point to the financial mainstream. Unfortunately,
recent regulations exempt prepaid cards from the interchange fee cap
only if the cards' features are limited. \5\
---------------------------------------------------------------------------
\5\ General use cards, if issued by a bank over $10 billion,
cannot have checks, electronic bill-payment features or transfers to
other accounts--including linked savings. Government agency cards
issued by large banks are not permitted to accept nongovernment funds
loaded by the consumer, preventing those cards from being used to bring
a more fully functional account to unbanked consumers.
---------------------------------------------------------------------------
Second, consumers must understand the cost and terms of their
accounts. Understanding is more than disclosure. Information must not
only be provided, but done so in a clear and conspicuous manner than
promotes actual awareness and understanding. Some prepaid cards do a
better job of this than others but many fall short. Some providers
disclose fees prominently on the outside of the package at retail
locations and on their Web sites, but those are the exception. On Web
sites in particular, fees tend to be buried several clicks away and in
the fine print of terms and conditions.
Even when clearly disclosed, prepaid cards can have complicated fee
schedules. Complex balkanized pricing can make it difficult to discern
the overall cost of an account or to compare different cards.
All prepaid cards should display, prominently, a chart of fees (and
other important terms). Researchers should explore a standardized price
tag that reflects the average cost of a card and gives consumers a
simple benchmark for comparing cards with different structures, just as
the APR provides a point of comparison for credit cards today.
Third, consumers' funds must be safe in the case of insolvency of
any party involved with the card, be it the bank, the program manager
or someone else. The FDIC has explained how prepaid card programs must
be set up to ensure FDIC insurance payable to the consumer regardless
of the size of the master account. Most prepaid cards follow the FDIC
requirements, but there is no way for consumers to know if they do, and
some may not.
However, not all prepaid cards are issued by banks or eligible for
FDIC insurance. American Express's prepaid cards are issued by its
Travel Related Services division and not its bank and do not have FDIC
insurance or any other Federal protection if AmEx were to become
insolvent. State money transmitter laws apply, but the protection they
afford varies from State to State and even in the best State does not
guarantee that the consumer will not lose funds or have them locked up
in a protracted bankruptcy proceeding. Though American Express appears
to be stable, bigger companies have failed, and the AmEx model may also
be copied by less venerable institutions. \6\
---------------------------------------------------------------------------
\6\ The precedent of permitting a company to hold consumer funds
in accounts that are not covered by deposit insurance also makes it
easier for dangerous products to emerge in the mobile payment space.
---------------------------------------------------------------------------
Regulators must insist that any general use reloadable prepaid card
carry deposit insurance, especially (but not only) if the card is used
for deposit of wages, benefits, or other income. \7\ Exceptions should
be permitted, if at all, only for very limited balance cards that
function more like gift cards.
---------------------------------------------------------------------------
\7\ Or, for prepaid cards issued by credit unions, the cards
should carry equivalent share insurance from the National Credit Union
Administration.
---------------------------------------------------------------------------
Fourth, consumers need protection from errors, unauthorized
charges, and disputes. The Electronic Funds Transfer Act and Regulation
E provide rights for bank account debit cards, payroll cards, and non-
needs tested Government benefit cards, but not for other types of
prepaid cards. Most prepaid cards voluntarily follow the Regulation E
payroll card rules. But determining whether they do requires
scrutinizing fine print for complicated legalese, and even then
consumers' rights are not as strong or enforceable as they would be if
they fell under Regulation E directly.
All prepaid cards should be covered by Regulation E. This includes
virtual prepaid cards and equivalent mobile payment systems.
In addition, consumers with prepaid cards--as well as those who use
bank account debit cards--should have chargeback rights if consumers
have a dispute with a merchant, just as they do with credit cards. The
likelihood of a problem with a purchase is no different than when the
purchase is made with a credit card or with a debit or prepaid card,
and consumers need the same ability to dispute a charge if they did not
get what they paid for.
Fifth, consumers need ample, free, and convenient access to account
information and customer service. Consumers should have multiple free
methods of determining their balances, viewing transaction information,
asking questions and resolving issues with their accounts. Most prepaid
cards are not provided through brick-and-mortar locations that offer
access to a human being. Fees may be charged for telephone customer
service, and the consumer must enter long strings of numbers and
navigate multiple menus to get to a live agent. Cards are typically
provided and marketed to lower income, underbanked consumers, and yet
consumers are expected to monitor their accounts online even if they do
not have easy Internet access or are not comfortable using computers or
accessing sensitive information online. Many prepaid cards do not offer
the option of signing up for paper statements at any price or charge
high fees for doing so. Fees are even charged for simple balance
inquiries at ATMs and accessing an automated customer service line.
Prepaid cards should not be a black box in the consumer's wallet.
They are accounts, and consumers should be able, and encouraged, to
monitor their accounts for fees, errors and unauthorized charges.
Consumers accustomed to the cash world may have questions about how the
cards work. Like any consumer, they need the ability to resolve the
problems that can arise. Admittedly, the margins on prepaid cards are
thin, and the industry has reasons for encouraging consumers to use
lower cost channels. But consumers should not be nickeled and dimed for
seeking the information they need, or worse, be inhibited from doing
so. Prepaid cards will remain a substandard form of account if the
industry does not find ways to encourage consumers to actively engage
with their accounts to get the information they need--and to view
prepaid card accounts as accounts, not just as disposable gift cards.
Sixth, prepaid cards must not have unfair fees or tricks and traps.
Not every fee is troubling. Prepaid cards provide a service, and
providers are entitled to charge for that service. \8\ If pricing is
simple enough to be understandable, consumers can decide if the value
is worth the price.
---------------------------------------------------------------------------
\8\ The exception is Government payment cards and payroll cards.
Those cards should be designed to be free to the consumer for routine
usage.
---------------------------------------------------------------------------
But some types of fees are problematic. Penalty fees should be
eliminated whenever possible. As we saw in the credit card market,
providers have terrible incentives to trick consumers into making
mistakes if penalty fees are any part of the profit model. \9\
Information and customer service fees, as discussed above, inhibit
consumers from getting information they need to manage their accounts.
Inactivity, monthly or other fees should also not be charged against a
zero balance account, creating a debt for an account that the consumer
may assume is empty and closed. Some cards also charge quite steep or
unexpected fees for other reasons.
---------------------------------------------------------------------------
\9\ Ideally, penalty fees will be eliminated altogether. At most,
they should cover the cost of the conduct and be coupled with active
measures to assist the consumer from making the mistake again.
---------------------------------------------------------------------------
Beyond specific problematic fees, the industry must simplify,
simplify, simplify and keep fees minimal and reasonable. The more fees
a card has, the more chances for confusion and unhappy customers. The
difference between in- and out-of-network ATM fees, and ATM fees v. ATM
surcharges v. ATM balance inquiries, can be bewildering. Some fees
associated with bill payment features are incomprehensible and quite
steep. Providers should help consumers to understand the cost of the
cards by eliminating all fees that are not necessary and giving
consumers the choice of a monthly fee that covers routine usage and a
pay-as-you-go model with a small number of fees for discrete services.
Prepaid cards also need to stay clear of the tricks that have
plagued other types of accounts.
Seventh, it is essential that overdraft fees and embedded credit
features be eliminated from prepaid cards. Overdraft fees are what have
driven many consumers out of bank accounts and created the opportunity
for prepaid cards. When and how small dollar credit should be provided,
through separate credit accounts, \10\ is another conversation, but the
security of deposit accounts should not be undermined by including
dangerous embedded credit features.
---------------------------------------------------------------------------
\10\ We do not categorically oppose linking prepaid cards to a
separate, affordable credit account as long as there is no offset of
the deposit account or mandatory electronic repayment. A discussion of
alternatives to payday loans and the features of a genuine alternative
can be found in National Consumer Law Center, ``Stopping the Payday
Loan Trap: Alternatives That Work, Ones That Don't'' (June 2010),
available at http://www.nclc.org/images/pdf/high_cost_small_loans/
payday_loans/report-stopping-payday-trap.pdf. The criteria are: 36
percent APR with fees, amortizing installment payments generally over
90 days, no offset or mandatory electronic repayment, and consideration
of ability to pay. Every form of credit that we have seen on a prepaid
card fails every one of these criteria.
---------------------------------------------------------------------------
Senator Brown, in your own State of Ohio, prepaid cards are being
used by the payday lender CheckSmart to evade Ohio's payday loan laws
through loans on prepaid cards issued by Florida-based Urban Trust
Bank. They are doing the same thing in Arizona. Prepaid cards with
credit features are all too easy to sell in payday stores where the
loans are illegal, taking us back to the rent-a-bank days when banks
loaned out their charters to payday lenders to use as a vehicle for
preemption.
Congress already directed prepaid card issuers to eliminate
overdraft fees by conditioning the interchange fee cap exemption on the
absence of such fees. But that rule does not apply to banks under $10
billion. The Treasury Department took an important step forward to
protect prepaid cards by banning attached lines of credit or loan
agreements on cards that accept direct deposit of Federal payments.
\11\ Again, the rule does not apply to every card.
---------------------------------------------------------------------------
\11\ See, 75 Fed. Reg. 80335 (Dec. 22, 2010). The interim rule has
not yet been finalized. NCLC's comments suggesting ways to tighten the
rule to prevent evasions are available at http://www.nclc.org/images/
pdf/other_consumer_issues/exempt_public_benefits/prepaid-card-
comments.pdf.
---------------------------------------------------------------------------
The very name ``prepaid card'' should mean what it says. Indeed,
``no credit check needed'' and ``you can't spend more than you have''
are common marketing refrains for prepaid cards. Banning overdraft fees
and other embedded credit features on prepaid cards would prevent
deceptive practices and confusion and make the cards a safe, genuine
alternative to bank accounts, deserving of the higher interchange fees
they are entitled to charge.
The good news is that things are generally moving in the right
direction. The choice of prepaid cards on the market has been
expanding. Banks, with their wide ATM networks (and capacity to accept
deposits of cash and checks), are entering the market, and the industry
is working on innovations like remote deposit capture that will make
prepaid card accounts more functional. Compliance with FDIC insurance
rules and Regulation E is generally the market standard. New means of
accessing account information, like automated text messages and smart
phone apps, are becoming more common. On many cards, fees have been
coming down and fee structures are being simplified (though not yet
enough). Most cards do not have overdraft fees and, other than the
CheckSmart card, other credit features are currently nonexistent. \12\
---------------------------------------------------------------------------
\12\ The Office of Thrift Supervision's laudatory 2010 action in
shutting down lines of credit that were unfair or deceptive helped send
a useful message to the industry, as did the Treasury direct deposit
rule. However, Russell Simmons has announced that he will be adding a
credit feature to his card.
---------------------------------------------------------------------------
But there are always outliers, and problematic cards harm not only
the consumers who use them but also the reputation of an industry that
is still introducing itself to the public. As the prepaid card industry
knows all too well, the general public perception of prepaid cards is
quite negative. The industry will have to work hard to gain public
trust.
Regulators can help both consumers and industry by leveling the
playing field and establishing strong minimum standards. The industry
should welcome thoughtful regulation to help bring prepaid cards into
the financial mainstream and take them out of the shadow banking system
where they are today.
Dialogue, like today's hearing, is critical. Thank you again for
this opportunity to testify. I would be happy to answer your questions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF JENNIFER TESCHER
President and Chief Executive Officer, Center for Financial Services
Innovation
March 14, 2012
Thank you, Chairman Brown, Ranking Member Corker, and Members of
the Committee. On behalf of the Center for Financial Services
Innovation, I appreciate the opportunity to participate as a witness
before the Senate Banking Subcommittee on Financial Institutions and
Consumer Protection on the matter of prepaid cards. We appreciate the
Subcommittee's attention to this important financial innovation.
I am the President and CEO of the Center for Financial Services
Innovation. CFSI is a national nonprofit organization, in its eighth
year of providing national leadership, research, and insights on the
everyday financial services needs of financially underserved consumers.
We conduct consumer and industry research to develop a broad
understanding of consumers in this segment and the products offered to
them. We organize roundtables with large and small financial services
providers and nonprofits to develop and advance products and strategies
for serving underserved consumers. Each year we bring together over 600
representatives from the financial services sector, including
innovators, nonprofits, and policy makers, to spotlight how innovation,
partnerships, and public policy can improve financial services for
underserved families. We provide grants to nonprofits that are building
underserved consumers' financial capability through the marriage of
financial education, financial products and technology.
Finally, we develop and champion Federal policy to spur financial
product innovation and market competition and address impediments to
access to high-quality financial services. Our vision is for consumers
to have access to an array of high-quality products and services that
enable them to safely and effectively transact, save, borrow, and plan.
CFSI has studied the general purpose reloadable (GPR) prepaid card
\1\ market for nearly a decade, publishing our first white paper on the
topic in 2004 when the cards were still commonly known as stored value
cards. We have published 16 reports since then, detailing industry
developments and consumer preferences, behaviors, and perceptions. We
have been working most recently with researchers at the Payment Cards
Center of the Federal Reserve Bank of Philadelphia to analyze prepaid
card transaction data to understand how consumers use the product. We
also work with nonprofit organizations to provide them the information
they need to help their clients use prepaid cards safely and
effectively; we published the Nonprofit's Guide to Prepaid in 2010.
Last summer, we convened the Prepaid Advisory Council, bringing
together 19 of the leading companies from across the prepaid supply
chain and consumer advocacy organizations to create a forum for
dialogue about what makes for a high-quality prepaid card. The group
dialogue has informed the creation of a prepaid quality guide, which we
expect to publish this summer.
---------------------------------------------------------------------------
\1\ In my testimony, I use ``prepaid card'' to refer to general
purpose reloadable (GPR) prepaid cards. As the description implies,
these are cards that can be broadly used (in contrast to, for example,
most gift cards or transit cards), can be reloaded by the user, and
carry the brand of one of the four major payments networks (Visa,
MasterCard, American Express, Discover). The type of card I am
referring to is sometimes also called a ``prepaid debit card'' or a
``prepaid card account.''
---------------------------------------------------------------------------
Yesterday, we released our recommendations for a standardized fee
box for improving the transparency of prepaid cards, and three prepaid
card providers have committed to adopt or test CFSI's proposed
disclosure box.
CFSI believes that well designed prepaid cards can offer a critical
onramp to the financial mainstream for underserved consumers. My
testimony will focus on the financial needs of consumers and how
prepaid can meet those needs, and on creating an enabling environment
that simultaneously supports high-quality innovation and protects
consumers.
What Are Prepaid Cards, and What Benefits Do They Offer Consumers?
Over the past decade, an ever-growing array of financial services
has become available for people who have traditionally been financially
underserved. Previously, the 30 to 40 million American households who
were unable to open a bank account or chose not to use one regularly
were limited to cash, money orders, and check cashers for their basic
banking needs. \2\ But technological innovations have given the
underserved more and better options, such as prepaid cards. Prepaid
cards were first introduced in the early 1990s and represent a family
of products ranging from gift cards to payroll cards to general
spending cards. CFSI's work focuses on general purpose reloadable (GPR)
prepaid cards, which have the most relevance and utility to the
underserved.
---------------------------------------------------------------------------
\2\ The FDIC's 2009 National Survey of Unbanked and Underbanked
Households estimated that approximately 30 million households were
underserved (http://economicinclusion.gov/about_survey. html). CFSI's
2008 Underbanked Consumer Study estimated that approximately 40 million
households were either unbanked or underbanked (http://
cfsinnovation.com/publications/list/CFSIUnderbankedConsumerStudy). The
two studies defined underbanked households slightly differently.
---------------------------------------------------------------------------
Prepaid cards are virtual bank accounts, and they represent a truly
new point of financial access at a time when access is diminishing.
Prepaid cards function like electronic bank accounts without checks;
consumers load funds on the card and, with the majority of prepaid
cards, can spend only what they load. And because prepaid cards can be
loaded only with funds that are immediately available, they overcome
the ``check hold'' problem that sends those who are living paycheck to
paycheck to check cashers rather than banks. \3\
---------------------------------------------------------------------------
\3\ Prepaid card providers typically encourage direct deposit of
funds and do not charge for it. Research has shown that prepaid card
customers using direct deposit load more money, use their card more
frequently, and keep their cards active for longer. As a result, many
prepaid providers are actively encouraging their customers to use
direct deposit. However, an estimated 25 percent of American workers
don't use direct deposit, either because they lack access to it or
choose not to use it. Those without direct deposit must use cash to
load their cards, meaning they first need to cash their check and pay a
fee for doing so. Some providers, like Walmart, will waive the fee to
load a prepaid card if a consumer cashes the check in the store.
Nonetheless, this ``cash in'' issue is an ongoing challenge to prepaid
and raises the cost to use the product. Innovations in remote-deposit
capture may offer a potential solution.
---------------------------------------------------------------------------
Anyone can qualify for a prepaid card, regardless of credit
history. Many underserved consumers either do not have, or do not
perceive themselves as having, a sufficiently positive credit history
to access traditional bank accounts. Prepaid cards do not require a
credit check, but they do offer many features of conventional cards,
including branded Visa or MasterCard logos and near-universal
acceptability.
Prepaid cards can be conveniently accessed and used. They are sold
in a variety of locations--retailers, bank and credit union branches,
online, nonprofit organizations, and more. The cards are accepted
nearly everywhere and can be used to pay bills, send money home, make
purchases, and save. For cash-based consumers, prepaid cards allow
users to make purchases and pay bills without carrying large amounts of
cash. They also enable access to Web-based commerce.
Prepaid card providers have in recent years begun to add a broad
range of features and functions--including bill payment, money
transfer, saving, and credit building--that hold promise for linking
near-term transactions to longer-term asset building. For instance, at
least five prepaid card providers now offer customers high-yield
savings accounts linked to their cards. \4\ Combining low-cost
transaction services with opportunities for savings and credit access
is seen as a ``best-practice'' model for the financial services
industry. \5\
---------------------------------------------------------------------------
\4\ These cards include Advance America Visa Prepaid Card, Plastyc
UPside Visa Card, NetSpend Prepaid-Debit-Card, Mango Money Prepaid
Card, and PreCash Vision Premier Visa Prepaid Card.
\5\ Caskey, John P. (2005), ``Reaching Out to the Unbanked'',
Inclusion in the American Dream. M. Sherraden. Oxford University Press,
NY: 149-165.
---------------------------------------------------------------------------
The promise of prepaid and the value it can provide is particularly
important in the wake of the financial crisis. An increasing number of
consumers are financially vulnerable due to foreclosure, unemployment
and high levels of debt. At the same time, new regulations reigning in
overdraft and interchange fees have changed the underlying economics of
a basic checking account, leading depositories to restructure and
reprice their offerings. The bottom line: underserved consumers face
reduced access to checking accounts and other basic financial products.
Consumers need more choices in the market, and prepaid has an
important role to play in meeting unmet financial needs. In part driven
by the broader trends, the nascent prepaid card industry has grown
rapidly, with millions of cards in use today. According to an industry
research group, the funds loaded onto GPR prepaid cards in 2008 totaled
$8.7 billion and is projected to rise to over $118 billion by 2012. The
total amount loaded onto all types of prepaid cards is estimated to
double over the next 3 years to $672 billion in 2013. \6\
---------------------------------------------------------------------------
\6\ Mercator Advisory Group, Seventh Annual Prepaid Card Forecast,
http://www.mercatoradvisorygroup.com/
index.php?doc=Prepaid&action=view_item&id=519&catid=16.
---------------------------------------------------------------------------
What Do Consumers Think of Prepaid Debit Cards?
In 2008, CFSI worked with researchers at the University of
Washington to conduct in-depth interviews with approximately two dozen
prepaid card users in order to understand why people were choosing to
use prepaid cards, how they were using them, and how consumers
perceived the product. \7\
---------------------------------------------------------------------------
\7\ Gordon, Sarah E. (2009), ``A Tool for Getting by or Getting
Ahead?'' CFSI. http://cfsinnovation.com/system/files/imported/
managed_documents/voc-prepaidfinal.pdf.
---------------------------------------------------------------------------
With some exceptions, customers in the study had low or moderate
incomes and substantial personal debt. Few owned a home. Unpaid utility
bills and fees were the most common sources of debt, and credit cards
and medical bills the largest debts.
All but one interviewee had used conventional bank-based checking
or savings accounts before starting to use prepaid cards, and a
majority had opened banking accounts as adolescents. But by the time of
the interview, 14 had no conventional bank account. Most had either
closed their accounts or had their accounts closed by the banks for
reasons that included overdraft fees, unexpected or unanticipated fees,
unauthorized account access, and being a victim of identity theft.
Overdraft fees were a common complaint. Some felt their bank chose
to honor one big check in order to allow several smaller checks to
bounce, each one incurring a costly overdraft fee. Unauthorized
transactions (the term was often used interchangeably with identity
theft), some of which put their accounts into the red, were another
problem mentioned. Some consumers said they simply could not understand
banks' fee structures. Customers did not hold themselves harmless in
disputes with banks. One mentioned a gambling addiction; others
considered themselves bad money managers. But the way their banks
handled or ignored their problems left them mistrustful.
Interviewees saw prepaid cards as a useful tool, a way to escape
the high fees imposed by banks and check-cashing companies. All
interviewees said they used their cards regularly to pay bills online
and over the phone and to make point-of-sale purchases such as
groceries and gas. The majority said they loaded funds through direct
deposit.
Taken together, the results suggested six elements of the prepaid
card experience that customers valued:
Convenience: Cardholders do not have to travel to multiple
locations to cash a check, buy money orders, and then deliver payments.
The only inconvenience mentioned involved cash reloads.
Accessibility and inclusion: Branded cards (with Visa, MasterCard,
Discover, or American Express logos) are accepted almost universally.
Moreover, the prepaid cards offer a feeling of inclusion, providing a
way to pay that does not differentiate users of prepaid cards from
cardholders who have debit or credit cards.
Immediate liquidity: Many low-income consumers use check cashers
rather than checking accounts because they cannot afford to wait for a
bank to clear a deposited check. Funds directly deposited to a quality
prepaid account are available immediately.
Simplicity and transparency: The fee structures of prepaid cards
are easy to understand. With few exceptions, prepaid cards charge fees
up front for services rendered, as opposed to checking accounts, which
charge unexpected penalty fees after the fact. Problems with checking
account overdrafts were a primary reason the cardholders interviewed
left their checking accounts for prepaid. \8\
---------------------------------------------------------------------------
\8\ For an explanation of why prepaid cards engender trust, and
why consumers are willing to pay more for that trust, see: Wolf, Daniel
(2012, March 1) ``Trying to Understand the Unbanked's Acceptance of
Prepaid Cards'', American Banker. http://www.americanbanker.com/
magazine/122_3/trying-to-understand-the-unbankeds-acceptance-of-
prepaid-cards-1046840-1.html
---------------------------------------------------------------------------
Value: Most customers felt the costs associated with prepaid were
fair and lower than what they would incur if they used a check casher
or checking account.
Built-in discipline: Customers liked knowing that they could only
spend what they had. They also used the cards to limit spending and
stay on budget.
About half of the consumers in the sample used a prepaid card with
a linked savings account, providing a window into whether more robust
card functionality can be useful. All but one consumer had deposited
funds into the savings account at some point and four customers had
balances ranging from $97 to $500 at the time of the interviews. Some
customers were using the account to build emergency savings, others to
help with monthly budgeting. Those who elected to have funds
automatically transferred upon every new load had more success amassing
savings.
It is important to acknowledge that not all prepaid products are
created equal, and there have been some that have been poorly
structured, outrageously priced, and a bad deal for consumers. On
balance, however, the accessibility, simplicity, convenience, and value
that most prepaid cards provide make them a promising product for
everyday consumers. To ensure prepaid lives up to that promise, it is
critical that we do more to ensure they provide a safe and robust
experience.
How Can We Ensure Prepaid Card Accounts Offer a Safe and Robust
Experience for Consumers?
Increasingly, prepaid cards are being marketed and used by
consumers as alternatives to traditional checking accounts. Currently,
however, these products are not explicitly required by regulation to
have many of the same consumer protections as bank accounts, such as
FDIC insurance, fraud and error resolution procedures, and account
disclosures. Although most major prepaid card providers already offer
all or most of these consumer protections, consumers need to be
confident that any prepaid card includes the same strong protections.
The best way to extend these protections to prepaid cards, however,
is not simply to replicate the way they have been applied to checking
accounts. Although the purpose and function of prepaid cards is similar
to those of checking accounts, their structure is fundamentally
different. To ensure that prepaid cards can continue to meet the unique
needs and demands of the underserved, protections must be thoughtfully
applied in a manner that is both suitable for the consumer and feasible
for prepaid providers.
CFSI recommends the following extensions of consumer protections to
GPR prepaid cards: \9\
---------------------------------------------------------------------------
\9\ Newville, D., and Koide, M. (2011), ``Prepaid Cards and
Consumer Protection'', Retrieved from: http://cfsinnovation.com/system/
files/CFSI_PrepaidPolicy_July2011.pdf.
---------------------------------------------------------------------------
1. Mandate FDIC pass-through insurance.
2. Extend Regulation E as it is applied to payroll cards and enhance
the protections by:
Lengthening the period for which transaction history is
available;
Enabling consumers to make a single request for ongoing
paper statements; and
Studying and leveraging advances in technology and
insights in financial capability to improve the delivery of
account information.
3. Require a standardized fee-disclosure box and encourage
additional disclosure tools for consumers, based on advances in
technology and insights in financial capability. \10\
---------------------------------------------------------------------------
\10\ Newville, David (2012), ``Thinking Inside the Box: Improving
Consumer Outcomes Through Better Fee Disclosure for Prepaid Cards'',
CFSI. Retrieved from: http://cfsinnovation.com/system/files/
CFSI_Prepaid%20Cards%20Whitepaper%20FInal--0.pdf.
While most prepaid companies have taken at least some steps to make
it easier for consumers to find and understand the fees associated with
their products, an examination of current prepaid fee disclosure
practices clearly shows that there is a need for improvement in the
industry overall. There tend to be a range of different kinds of fees
across card products, and exactly how and where they are disclosed
varies widely, making it difficult for consumers to make comparisons
before they make a purchase decision.
CFSI has designed a model fee disclosure box based on research on
current fee disclosure practices in the prepaid card marketplace, best
practices in disclosure for a variety of financial and nonfinancial
products, and extensive data on the types of prepaid card fees
consumers are currently incurring. Three prepaid card providers--Green
Dot, Plastyc, and Ready Credit--have committed to adopt or test CFSI's
proposed disclosure box. \11\
---------------------------------------------------------------------------
\11\ Center for Financial Services Innovation (2012), ``CFSI
Proposes a Model Fee Disclosure Box for Prepaid Cards'' [Press
Release]. Retrieved from: http://cfsinnovation.com/content/cfsi-
proposes-model-fee-disclosure-box-prepaid-cards.
---------------------------------------------------------------------------
Ultimately any model fee box adopted by regulators, as CFSI
recommends, should be based on robust consumer and industry research,
and have both the costs and benefits of the specific aspects of its
design carefully measured and weighed. It should also be vetted by and
be the product of vigorous discussions among all the major stakeholders
in the field, including industry representatives, consumer advocates,
nonprofit practitioners, regulators, and researchers. Lastly, any
proposed model fee box should be rigorously tested on actual prepaid
card consumers to ensure its effectiveness before being implemented.
In conclusion, prepaid cards hold great promise for improving the
manner in which tens of millions of American households conduct their
financial activities. Like traditional checking accounts, their utility
and their cost depends on the terms of the product, the customer's
understanding of the product, and how the customer uses the product.
But at a time when traditional financial institutions are changing the
pricing structures of their accounts and apparently losing low-balance
customers, it is important to encourage the evolution of a well-
designed, easily understood, safe alternative.
Thank you, Chairman Brown, Ranking Member Corker, and Members of
the Committee. I hope these insights prove useful as you seek to ensure
that everyday consumers have access to innovative and safe products
that help them live their best financial lives. I look forward to your
questions.
______
PREPARED STATEMENT OF DANIEL R. HENRY
Chief Executive Officer, NetSpend Holdings, Inc.
March 14, 2012
Mr. Chairman, Senators, thank you for the opportunity to appear
before you today and talk about the ways in which entrepreneurial
companies are serving a huge part of the American population that has
been underserved by the banking system this Committee oversees. I am
Dan Henry, Chief Executive Officer of NetSpend. NetSpend is one of the
Nation's leading providers of general purpose reloadable prepaid debit
cards for underbanked consumers. Our mission is to empower consumers
with the convenience, security and freedom to be self-banked. We are
proud of what we do, and committed to collaborating with policy makers,
regulators, advocates, and our industry peers to promote a clear and
effective regulatory framework for our industry and the consumers we
serve.
I joined NetSpend in 2007 after having spent more than a decade
building another business that brought modem financial services to
consumers in former Warsaw Pact countries where, for a time, entire
populations were essentially unbanked. When I came to NetSpend
initially as an independent Board member, I was astonished to learn
that a huge portion of the population of my own country was unbanked,
and excited to be part of a company that had figured out a way to
change that--so excited that, when the opportunity presented itself, I
joined the company full time as its CEO.
According to the FDIC, there are 60 million underbanked consumers
in the United States. This number includes consumers who literally have
no bank checking or savings account, and a larger number who have a
traditional bank account but primarily rely on alternative financial
services providers like check cashers for their financial services
needs. Why is this? Consider another fact from the FDIC: 73 percent of
banks are aware that there is a significant underbanked population in
their market, but less than 18 percent of them say that serving that
population is a priority. Most traditional bank products and fee
structures really are not designed for underbanked consumers, who
typically maintain very low average balances. It may surprise you to
hear that, of NetSpend's 2.1 million active cardholders, several
thousand are employees of Bank of America, Chase, and Citibank--
presumably customers who know what their alternatives are, and
concluded the NetSpend card is the best one to meet their needs.
Our customers are typically working Americans who want control,
security, and convenience in their financial services, and who
typically have not had good experience getting what they need from
traditional bank products. They are almost all U.S. citizens, the
majority earning $50,000 or less per year, with high school educations
or less. They typically put a few hundred dollars into their card
accounts every couple of weeks, and maintain an average balance of less
the $100. They are people who deserve the same quality of financial
services as the more affluent customers targeted by traditional banks--
which means they need products tailored to their unique needs. We are
proud to have the opportunity to serve them, and mindful of the
responsibilities that come with that. We think most of our customers
are pleased with our products and services, and well aware of their
options, as evidenced by the customer testimonials I have provided (and
would request, with your permission, be included in the record).
The reason we have our customers is because we provide them with a
better solution to meet their financial services needs versus a
traditional bank checking account or cash--which is often what they
were using before they got a NetSpend card. The majority of our
customers come to us because we were recommended to them by a friend or
family member. Bear in mind that the NetSpend card, like the similar
products of our competitors, is a bank account. It is FDIC-insured on a
pass-through basis, subject to the same consumer protections and
compliance requirements as a checking account, and provides access to a
host of financial services including flexible fee plans that can be
tailored to a particular customer's usage and budget, a 5 percent
savings account, free person-to-person account transfers, free direct
deposit of payroll and benefits, bill payment services, real time
account alerts that let consumers always know how much money they have,
more than 100,000 brick-and-mortar locations where consumers can add
funds to the card accounts, and a host of financial literacy and
budgeting tools. We have also developed what we believe are effective
and responsible ways to help our customers meet short-term emergency
needs, by allowing them to incur a negative balance of up to $10
without incurring a fee, and with a fee-based overdraft program that
allows customers to overdraw their accounts by up to $100--but with
buffers and a grace period that result in most overdraft transactions
to avoid any fee, effective measures to prevent excessive use, and
education about available alternatives. We believe our overdraft
program is the best in the industry and the fees are cheaper than any
bank or credit union. So our product is a bank account--but one in
which we have stripped out the real estate and personnel costs of bank
branches, leveraged the infrastructure of nonbank retailers, employers,
and direct marketing to reach underbanked consumers where they live,
work and shop, and leveraged technology to build a product platform and
network that provides these consumers with utility, security, dignity,
and access they have never had before.
The fact is that American consumers are migrating to reloadable
prepaid debit cards like NetSpend's because our products are better--
and cheaper--than the alternatives. Just this week the economist
Michael Flores of Bretton Woods, Inc. released a new study of
reloadable prepaid cards that showed the following:
Consumers that use a reloadable prepaid card with direct
deposit have an average cost savings of 40 percent versus a
low-balance checking account. Checking accounts have monthly
fees that can be avoided with a recurring direct deposit or a
daily minimum balance of up to $1,500--while the typical
underbanked consumer maintains a balance of less than $100.
Reloadable prepaid cardholders costs average $8-$20 a month if
they use direct deposit, versus $15-$37 a month for low-balance
checking account users.
Consumers who switch from cash to a reloadable prepaid card
have an average cost savings of 56 percent. Cash costs
consumers an average of $9-$48 a month--and that doesn't even
factor in the costs in terms of the time they spend cashing
checks, sending money, and paying bills with cash.
The study also showed what those of us in the industry know well--
the prices of reloadable prepaid cards are trending down, due to fierce
competition and savvy consumers, while in the aftermath of interchange
fee caps and other factors the price of low-balance checking accounts
is trending up. The study shows that satisfaction with prepaid remains
high, and the customer profile is expanding beyond the underbanked, as
a new generation of Americans gravitates towards products like ours--
and the idea of being ``self-banked.'' The study reminds us that many
of the consumers we try to serve do not have equal access to checking
accounts, because they are among the up to 19 percent of U.S. adults
(according to the FDIC) who can't qualify for an account because they
are in the ChexSystems or TeleCheck database of customers that have
mishandled accounts in the past.
Perhaps because of the entrepreneurial energy of our industry, and
the way it uses nonbank channels and cutting edge technology to serve
underserved consumers at a low cost, there is sometimes a perception
that the prepaid industry is an unregulated, or at least under-
regulated, ``Wild West.'' The fact is that we and our products are
highly regulated, at both the Federal and State levels.
NetSpend and its competitors partner with banks that want to serve
these customers, and help them use innovative technology and marketing
approaches to develop and market new products to customers who those
banks would not otherwise reach with checking accounts originated in
their branches. The products and programs are principally regulated by
the regulators of the issuing banks, which we experience throughout the
year as our issuers undergo their examinations by the OCC and FDIC and
every aspect of what we do is closely scrutinized. Those agencies also
(in our view) have the authority to directly examine us as a service
company for our banks. We are required to (and do) provide Regulation
E-compliant electronic statements and error resolution procedures, full
dispute and chargeback rights, and privacy policies that comply with
Gramm-Leach-Bliley and applicable State law. We must maintain
comprehensive antimoney laundering programs both for our banks and as a
prepaid access provider under the rules adopted last year by FinCEN.
Those of us who work with retailers to handle consumer funds are
regulated by the States as money transmitters, subject to regular joint
examinations. And one of our leading competitors just received approval
from the Board of Governors of the Federal Reserve to acquire a State
bank and become a bank holding company, which I think reflects the
maturation of the industry and the recognition among the regulators of
its importance to the future of financial services in America.
We at NetSpend welcome efforts to eliminate any ambiguity about
what rules apply to our business and our industry. For the past 2
years, I personally have led an outreach program to financial
regulators and consumer advocates to help achieve that. We have
appreciated our direct engagement with the extremely capable staff of
the new Consumer Financial Protection Bureau as they work to learn more
about our industry and the customers we serve. We are pleased that
leaders in Congress have focused their attention on the industry, as
reflected in Senator Menendez's proposed Prepaid Card Consumer
Protection Act--many of the provisions of which involve standards to
which we already adhere and support. But we also believe it is very
important that we maintain ground rules in a way that enhances
consumers' freedom of choice, rather than limiting it. We are all
committed to developing more effective ways to communicate with our
customers about the fees, terms, and conditions of our products. We
already try to do that every day, because the better consumers
understand our offering, the more likely they are to choose it over the
alternatives. But limitations on the products, such as restrictions on
the types of fees that can be charged, will only harm consumers.
For example, Senator Menendez's bill would prohibit a consumer from
being charged a per-transaction fee for using their card to make a
purchase. At NetSpend, we give our customers the choice of paying a
monthly fee, or paying on a per-transaction basis. And the data show
that the customers who opt to pay as they go do so because it is the
right plan for their usage. We believe legislation that would limit our
ability to give consumers these choices, which they typically use to
their advantage, would not achieve the desired result. The focus should
be on maximizing consumer choice--and creating an environment for
continued innovation and competition--by focusing on maintaining high
standards of disclosure of fees and other terms.
I believe those of us who serve the underbanked population of the
United States have a higher standard to which to adhere, with an ethos
of service to hardworking people often struggling to make ends meet.
And in doing so, we learn how very savvy those consumers are about the
costs of the financial tools they use--especially when we do our job
well in communicating with them about their choices. To do so, we need
to be allowed to compete on a level playing field with the traditional
bank products that have failed these consumers. We believe price
controls and prohibitions will only limit choice and stifle innovation
in a brand new industry whose rapid success shows how great are the
unmet needs of our customers. We look forward to working with policy
makers, regulators, and advocates to continue enhancing disclosure
standards in a way that gives everyone confidence that the choices our
customers make are fully informed--while we all work to facilitate the
development of financial services products that serve underbanked
Americans who have largely been left behind by traditional banking
products.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF L. RICHARD FISCHER
Partner, Morrison and Foerster
March 14, 2012
Chairman Brown, Ranking Member Corker, and Subcommittee Members, my
name is Rick Fischer. I am a partner in the law firm of Morrison &
Foerster LLP, and I practice in the firm's Washington, DC, office. I
have over 40 years of experience in advising banks and other financial
services companies on retail banking matters, including those relating
to prepaid cards, particularly cards that are issued by banks and
branded by a system mark, such as Visa. I am pleased to appear before
you today on my own behalf to discuss the prepaid card market. The
underlying message of my testimony is that legislative activity
relating to the prepaid market is unnecessary at this time. Overall,
the structure and oversight of the prepaid card market meets the needs
of both consumers and card issuers. Specifically, the prepaid card
market provides appropriate consumer protections while still enabling
this new consumer product to develop. And, any perceived deficiencies
can be addressed through the new regulatory authority Congress has
given the Consumer Financial Protection Bureau (CFPB).
The Benefits and Popularity of Prepaid Cards
Prepaid cards are an innovative financial product that satisfies
the consumer financial service need between traditional deposit
accounts and alternative financial services, such as check cashing.
Although still a relatively small segment of the overall payment card
market, the number of prepaid card users is growing rapidly. In fact,
prepaid card payments are the fastest growing segment of noncash
payments in the United States; \1\ ``the number of prepaid card
transactions increased 21.5 percent per year from 2006 to 2009.'' \2\
---------------------------------------------------------------------------
\1\ 2010 Federal Reserve Payments Study, ``Noncash Payment Trends
in the United States: 2006-2009'', at 17, April 5, 2011, http://
www.frbservices.org/files/communications/pdf/press/
2010_payments_study.pdf.
\2\ Id.
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Prepaid cards function like checking accounts, but without the
checks and at a significantly lower cost. Prepaid cards allow a user to
add or ``load'' funds onto the card, store the funds with the prepaid
card issuer and then spend or withdraw the funds in a variety of ways,
including purchases at a wide variety of merchants. The term ``prepaid
card'' encompasses a variety of financial products such as general
purpose reloadable cards, Government benefit cards and payroll cards. A
variety of entities issue prepaid cards including banks, retailers, and
other private companies. Merchant-branded prepaid cards, which can only
be used at that merchant or group of affiliated merchants, were the
most frequently used cards in 2009 with 2.7 billion transactions, and
general purpose reloadable cards were used to fund 1.3 billion
transactions. \3\
---------------------------------------------------------------------------
\3\ Id.
---------------------------------------------------------------------------
Prepaid cards are an attractive, cost-effective payment option for
consumers, and allow consumers with less than perfect credit, or who
prefer not to use credit or a traditional deposit account, to function
in an increasingly noncash world. For example, prepaid cards enable
consumers to shop on the Internet and to purchase travel-related
services, such as rental cars, airline tickets, and hotel stays, which
otherwise would require a credit card or a debit card to complete the
purchase. Prepaid cards also allow a consumer without a deposit account
to receive payroll funds and Government benefits through direct
deposit, and easily access those funds through use of the card. So,
prepaid cards benefit Government agencies and employers as well.
Prepaid cards also permit a consumer to make purchases and pay
bills without carrying large amounts of cash or risking the imposition
of overdraft fees. However, if the need for cash arises, many prepaid
card programs permit a consumer to obtain cash at an ATM. Even if a
consumer has access to credit and a traditional deposit account,
prepaid cards provide consumers an additional tool to better budget
their transactions and avoid fraudulent access to their deposit
accounts if the card information is compromised through a data breach.
As the popularity and use of prepaid cards increases, issuers are
adding product features, including rewards, mobile phone interfaces,
and limited credit features. All of these benefits explain why prepaid
cards are a growing financial product choice for U.S. consumers,
including the approximately 60 million unbanked and underbanked
consumers in the United States. \4\ Not only do consumers appreciate
the convenience afforded by prepaid cards, \5\ they also appreciate the
simplicity and transparency of prepaid products. For example, debanked
consumers, those who formerly used deposit accounts but now rely on
prepaid cards, appreciate the absence of unanticipated overdraft fees.
---------------------------------------------------------------------------
\4\ Federal Deposit Insurance Corporation National Survey of
Unbanked and Underbanked Households, at Section 3, December 2009,
www.fdic.gov/householdsurvey/full_report.pdf.
\5\ Center for Financial Services Innovation, ``A Tool for Getting
by or Getting Ahead? Consumers' Views on Prepaid Cards 2009'', http://
cfsinnovation.com/node/330566.
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Prepaid Card Regulation Consumer Protections
With the growth of prepaid cards in the United States, State laws
regulating the sale and administration of prepaid cards are
proliferating and existing Federal rules are evolving to address
prepaid card practices. And payment system rules like the Visa
Operating Rules enable consumers to dispute, or ``charge back,''
transactions and protect consumers from unauthorized use of their
prepaid cards in the same manner as debit cards tied to traditional
checking or savings accounts. Moreover, under Federal Deposit Insurance
Corporation (FDIC) guidance, all prepaid card funds maintained at
insured financial institutions must be protected by FDIC deposit
insurance.
At the Federal level, certain prepaid cards are governed by the
Electronic Fund Transfer Act (EFTA) and its implementing regulation,
Regulation E. For example, on May 22, 2009, President Obama signed the
Credit Card Accountability Responsibility and Disclosure Act of 2009
(CARD Act), which amended the EFTA by adding new provisions regulating
certain gift cards and other prepaid cards. This rule covers ``general-
use prepaid cards'' and ``store gift cards,'' ``issued on a prepaid
basis primarily for personal, family, or household purposes to a
consumer . . . in exchange for payment . . . and redeemable upon
presentation.'' \6\ The rule requires that a consumer be provided with
specified disclosures prior to purchase of a card, restricts the
circumstances under which a consumer may be charged certain fees, and
restricts the circumstances under which a card may have an expiration
date.
---------------------------------------------------------------------------
\6\ 12 C.F.R. 1005.20(a).
---------------------------------------------------------------------------
In addition, the Federal Reserve Board (FRB) has applied other
provisions of Regulation E to certain types of prepaid cards.
Specifically, the FRB extended to payroll cards the Regulation E
requirements relating to initial disclosures of the terms and
conditions, liability protections, change-in-terms notices, error
resolution notices, and more convenient card balance and transaction
information. Regulation E requirements also apply to certain non-needs
tested Government benefit cards, including State unemployment cards and
prepaid cards issued to Social Security recipients.
When the FRB promulgated the gift card and payroll card rules, it
concluded that the differing consumer protections were appropriate for
specific types of prepaid cards, given the current state of the prepaid
card market, and stated that the Board would continue to monitor the
market to determine when additional regulatory action was warranted. As
discussed below, this oversight authority now resides with the Consumer
Financial Protection Bureau.
State prepaid card regulatory regimes further supplement the
Federal structure by providing additional consumer protections. In
particular, State consumer protection laws regulate the sale and
administration of prepaid cards and often limit or prohibit expiration
dates or fees, require specified disclosures and address cash
redemption of unused card balances. Generally, such prepaid card laws
are based on the notion that a consumer should not be deprived of his
or her right to the underlying of the prepaid card value. Moreover,
under the Federal EFTA, such State laws are preserved if the State laws
are not inconsistent with EFTA and are more protective of consumers.
This preemption provision has preserved State consumer protection laws
relating to prepaid cards, affording consumers with additional
protections.
For example, California prohibits certain prepaid cards from
expiring. \7\ California law also prohibits service fees in connection
with certain prepaid cards except for the imposition of a dormancy fee
if the value on the card is five dollars or less at the time each fee
is assessed and the fee is not in excess of one dollar per month. \8\
Furthermore, such prepaid cards must be redeemable in cash or must be
replaced at no cost to the holder. \9\
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\7\ Cal. Civ. Code 1749.5. The statute applies to ``gift
certificates'' which include gift cards, but does not include any gift
card usable with multiple sellers of goods or services, provided the
expiration date, if any, is printed on the card. This exemption does
not apply to a gift card usable only with affiliated sellers of goods
or services. Cal. Civ. Code 1749.45(a).
\8\ Cal. Civ. Code 1749.5(e).
\9\ Cal. Civ. Code 1749.5(b).
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The Consumer Financial Protection Bureau
The CFPB has the authority to regulate the offering and provision
of ``consumer financial products,'' including prepaid cards. The CFPB
is directed to implement and enforce Federal laws to facilitate the
consistent, fair, and orderly functioning of the consumer financial
services markets and, thus, has the ability to empower consumers to
more effectively control their personal and household finances.
In particular, the CFPB has been given primary Federal regulatory
authority over ``consumer financial products,'' including prepaid
cards, \10\ and most Federal consumer financial protection statutes.
This authority includes the ability to promulgate rules that the CFPB
determines to be ``necessary or appropriate'' to carry out the
objectives of Federal consumer financial laws. With respect to prepaid
card products, the CFPB has inherited the authority of the FRB to apply
Regulation E, including its disclosure requirements and error
resolution provisions, to prepaid cards. Also, the responsibility of
the FRB to monitor the developments in the prepaid market to determine
whether to propose additional consumer protections under Regulation E
now rests with the CFPB, and the CFPB has made it clear that a review
of prepaid card fees, disclosures and practices is a priority.
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\10\ See, Section 1002(15)(A)(v) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat.
1376, 1958 (July 21, 2010).
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Moreover, the proposal of regulatory changes is not the only
consumer protection option available to the CFPB. The CFPB also has the
ability to take enforcement action to prevent a card issuer or a
covered service provider from ``committing or engaging in an unfair,
deceptive, or abusive act or practice'' with respect to a transaction
with a consumer that involves aconsumer financial product or service,
including prepaid cards.
Congress has created the CFPB and directed it to oversee a fair
market for consumer financial products and services, including prepaid
cards. The authority vested by Congress in the CFPB is sufficient to
address any additional consumer protections needed for prepaid cards.
The CFPB has announced its intention to address prepaid cards and the
CFPB should be given the opportunity to do so.
Thank you for the opportunity to appear before the Subcommittee,
and I would be pleased to address any questions.
______
PREPARED STATEMENT OF DAVID ROTHSTEIN
Researcher, Policy Matters Ohio
March 14, 2012
Chairman Brown, Ranking Member Corker, and Members of the
Subcommittee, thank you for giving me the opportunity to testify on
behalf of Policy Matters Ohio and the New America Foundation. Policy
Matters is a nonprofit, nonpartisan research institute that focuses on
issues impacting low- and moderate-income working families. The mission
of New America's asset building program is to significantly broaden
access to economic resources through increased savings and asset
ownership, thereby providing families with enhanced economic security,
a direct stake in the commonwealth, and the means to pursue their
aspirations.
My research is primarily focused on the financial status and
socioeconomic challenges experienced by the millions of low- and
moderate-income families and tax filers in the United States. My
testimony today is based upon the following three premises:
1. Low- and moderate-income families need and deserve full
transparency and disclosure of fees associated with prepaid
debit cards;
2. Prepaid debit cards, particularly cards with public benefits and
tax returns loaded on to them, should not have features that
add high fees such as overdraft charges and balance inquiry;
3. The prepaid debit card market should not be a replacement but
rather a complement to other financial products that build and
manage assets for working families.
Let me start by commending this Committee for holding this
informational hearing on a relatively new but already large market.
Millions of low- and moderate-income families use prepaid debit cards
for their day-to-day purchases but also receive them for public
benefits such as unemployment compensation, food assistance, and State
tax refunds. The FDIC reports that at least 9 million households were
unbanked and 17 million were under-banked in 2009. These families are
financially vulnerable, so protecting and growing their assets is
especially important. Government or public sector cards, paid for with
public dollars, are used to provide unemployment compensation, food
assistance, and other public benefits. Ensuring those dollars are not
siphoned off by unnecessary fees should be a top priority.
While I represent a viewpoint of consumers nationwide, I also can
provide an on-the-ground perspective about prepaid debit cards used for
unemployment compensation in Ohio. In 2011, more than half-a-million
Ohioans received UC bringing $3.3 billion to Ohio families. \1\
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\1\ Randy Tucker, ``Ohio Unemployment Fraud More than Doubles in 5
Years'', (March 8, 2012) Dayton Daily News: http://
www.daytondailynews.com/news/dayton-news/ohio-unemployment-fraud-more-
than-doubles-in-5-years-1340906.html.
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Ohioans have two choices for receiving their unemployment
compensation. One is through direct deposit to a bank account from the
Ohio Department of Job and Family Services (ODJFS). ODJFS deposits the
unemployment compensation into the client's bank account every week.
This is an excellent option for clients who have bank accounts,
avoiding paper checks, which can get lost or stolen, and ensuring quick
deposit of funds.
The second method is through an electronically loaded debit card
called the ReliaCard--a prepaid Visa card provided by U.S. Bank. \2\
Ohio is one of 41 States that provide a prepaid debit card as an option
for unemployment compensation. Upon successfully completing the
application for UC, this debit card is loaded with a client's
compensation and the recipient can use the card like a regular prepaid
debit card. The ReliaCard, which is used in other States as well, also
has several advantages over paper checks, which are no longer an option
in Ohio. \3\ First, the ReliaCard allows recipients without bank
accounts to receive compensation and not pay to cash a check. Second,
the ReliaCard allows recipients to make electronic purchases and bill
payments, unlike cash or check options. Third, the card, which requires
a code, is harder to steal than cash or a check. Finally, recipients
get their benefits several days sooner. We began research last year on
this card because our colleagues in housing, tax preparation
assistance, and employment training alerted us that individuals
receiving unemployment compensation were overdrafting on their
benefits.
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\2\ http://jfs.ohio.gov/ouc/ReliaCard_FactSheet.pdf
\3\ The National Consumer Law Center released a report on May 10,
2011, that details how States are using debit cards for public
benefits. The report by Lauren Saunders, ``Unemployment Compensation
Prepaid Cards,'' suggests removing ``junk fees'' from prepaid debit
cards loaded with public benefits. The ReliaCard by U.S. Bank is one
card used by multiple States but the terms of the agreement differ
slightly per State. http://www.nclc.org/issues/unemployment-
compensation-prepaid-cards.html
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ODJFS officials estimate that 30 to 40 percent of those receiving
UC now choose the ReliaCard. \4\ Based on the number of Ohio
unemployment compensation recipients, an estimated 200,000 clients used
the ReliaCard in 2011. \5\ The ReliaCard is convenient for many users.
However, it also can carry fees on cash withdrawal and overall use
(see, Table 1, attached). U.S. Bank charges $1.50 for withdrawing money
at non-U.S. Bank locations or ATMs that are not part of the Visa PLUS
ATM network, and the other bank may also charge for that transaction.
There are fees for balance inquiries at non-U.S. Bank locations. The
ReliaCard also has overdraft fees of $17.00 for purchases that exceed
the value on the card if they opt in for coverage. \6\ However, this
fee is likely to be dropped this July due to the Durbin Amendment on
interchange fee rules. It is important to note that ATM and overdraft
fees can add up--incurring multiple charges in a day or week.
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\4\ Interview and email correspondence with Ms. Laura Abu-Absi,
ODJFS on October 6, 2010.
\5\ This is a lower-bound estimate using 30 percent of the 674,000
clients receiving unemployment compensation. ODJF reported higher
numbers to the Cleveland Plain Dealer in 2011: http://
www.cleveland.com/consumeraffairs/index.ssf/2011/05/
report_gives_ohios_unemploymen.html.
\6\ The ReliaCard program states that a client can have one
overdraft fee reversed.
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The ReliaCard has some positive components to its fee structure.
There are no fees for point-of-sale transactions, so the card can be
used anywhere that accepts Visa. Card users can purchase above the
price of the transaction and receive cash back for no additional charge
from most merchants. There is no bank transfer fee or penalty for
moving funds from the ReliaCard to a bank account. \7\ Balance
inquiries are also free at U.S. Bank and Visa PLUS ATM locations, which
allow clients to better manage their finances and avoid overdrafts.
Several other features are free including customer service inquiries,
paper statements, and replacement of lost or stolen cards. Other public
sector debit cards charge for these items.
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\7\ The client's bank may charge a fee for this process.
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In addition to concerns about fees, there are reasons to be
concerned about access to U.S. Bank and free network locations.
ReliaCard users can get fee-free access to their benefits at U.S. Bank
locations and at ATM locations through the Visa PLUS ATM program. There
are approximately 750 such ATMs in the Ohio network, however not all of
Ohio's 88 counties have one of these locations. \8\ In fact, 33
counties have no U.S. Bank locations and 16 counties have no Visa/PLUS
ATM locations. Many of the nonurban counties have few locations, often
one free location every 20 miles. We have attached maps of the
unemployment rates and ReliaCard coverage to this testimony. Some of
the areas with the highest unemployment rates have the fewest
locations. Given the importance of cash and realities of traveling long
distances for unemployed workers, accessibility to no-cost ATMs is
paramount. Requiring unemployed workers to pay $3 or more for each ATM
transaction is egregious and also a waste of taxpayer dollars.
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\8\ Visa/PLUS ATMs were found on 3/11/2011 from http://
visa.via.infonow.net/usa_atm/. A public records request with ODJFS
yielded a list in June 2011 with the same information.
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Also of concern is that it was extremely difficult for Policy
Matters to find information on ATM locations, how to use the card and
the fee structure. ODJFS and U.S. Bank branches had trouble reporting
to us and were inconsistent in answers to these questions. In fact, it
took months to get a full list of the non-U.S. Bank locations
participating in the Visa PLUS network.
This research on Ohio's ReliaCard led me to the three premises I
mentioned at the outset.
First, it is essential that families understand the fees associated
with the prepaid card. Many families receiving public benefits or tax
returns on a prepaid card will think it functions like a gift card,
which is not accurate. The fees should be disclosed and transparent,
which also means readable language that includes examples. Clients
should read phrases that say ``If you use this card at a noncovered
bank, you will be charged a $1.50 fee from the card and another fee
from that ATM.'' Some potential policy changes that would benefit
consumers would be a standardized box on contracts and statements that
displays fees and costs of the card. On credit card statements, this is
often known as the ``Schumer Box,'' in reference to Senator Schumer of
this Committee and his efforts for disclosure on credit cards.
Additionally, comparing different prepaid debit cards is challenging.
We have a formula, the annual percentage rate (APR), for comparing the
cost of credit. We should develop a similar tool that allows for
ranking different prepaid card products. In the end, this will allow
for the best prepaid card products to flourish in the market.
On the second premise, it is crucial that prepaid debit cards
loaded with public benefits and tax refunds are not fee-ridden. Similar
to Ohio's ReliaCard, several States have a prepaid debit card for State
tax refunds with a comparable fee schedule. \9\ However, not all
prepaid cards have the same fee schedules. With the exception of
overdraft and out-of-network ATM charges, Ohio's ReliaCard has few
fees. Other Government-issued prepaid debit cards carry additional fees
that should be reduced if not eliminated. I highlight some of these
fees below.
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\9\ Karen Harris, ``Tax Refunds Issued on Prepaid Cards Take a
Toll on Consumer'', The Shriver Center http://www.theshriverbrief.org/
2012/02/articles/asset-opportunity/tax-refunds-issued-on-prepaid-cards-
take-a-toll-on-consumers/
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Again, for Government-issued cards that are loaded with public
benefits and tax refunds, overdraft fees should not be an option. If
the balance is $0, the card should not produce a transaction. Also,
prepaid debit cards should not have a credit function to them. Credit
cards are a very different product than prepaid cards and this can get
confusing when the card has a Visa or MasterCard logo for network
transactions. Additionally, clients should not be charged fees for
checking balances at any ATM, even out-of-network. A balance inquiry is
important for managing benefits as with a regular bank account. Also,
customer service calls should not have a charge--there should also not
be a charge to talk to a live person. Finally, we recommend that
clients in rural or low-ATM areas be given one free out-of-network ATM
transaction from the prepaid card for every deposit from the State
agency. At bare minimum, they could move the money to a more convenient
banking product or account to avoid ATM fees.
On the third premise, I want to stress that prepaid debit cards are
a useful tool in managing the assets of the working families. At the
same time, it is imperative that prepaid debit cards are not a
substitute for savings accounts and mainstream financial products.
There is a growing concern in the consumer community that prepaid debit
cards will replace innovative products and services to low- and middle-
class families looking to grow their assets. There are huge policy
implications if prepaid cards become the new norm for these clients, a
``second tier'' banking product of sorts. If so, prepaid cards are more
of a tool for financial exclusion than inclusion--which would damage
communities. Asset building is an important part of economic mobility,
whether it is creating an emergency fund or saving for college.
Families should always have the option of direct deposit for a
Government benefit rather than the card.
Few prepaid debit cards have a savings bucket and no Government-
issued cards allow other funds to be loaded onto the cards.
Additionally, many prepaid cards do not allow customers to pay bills or
write electronic checks--an obvious difference from a checking account.
In sum, I believe that prepaid debit cards are helpful and present
a needed alternative to other financial products. It is essential that
they are transparent, not fee ridden, and part of a larger financial
inclusion plan. I appreciate the opportunity to testify before you. I
am happy to answer any questions at this time. Respectfully submitted,
David Rothstein.
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\10\ http://jfs.ohio.gov/ouc/ReliaCard_FactSheet.pdf
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Additional Material Supplied for the Record
LETTER SUBMITTED BY CHAIRMAN SHERROD BROWN FROM WILLIAM E. SAUNDERS,
CHIEF EXECUTIVE OFFICER, COMMUNITY CHOICE FINANCIAL
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF THE NETWORK BRANDED PREPAID CARD ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]