(New York, NY): Prepaid card issuers are preparing for unprecedented regulatory change – and bracing for new risks – in advance of the Consumer Financial Protection Bureau’s long-awaited rules set for release this spring.
The regulation, which will apply federal consumer protection laws to prepaid cards for the first time, is expected to expand disclosure requirements, reclassify some accounts, and widen the prepaid umbrella to cover a vast and diverse product set. The final rules and related implementation will be at the forefront of the agenda at Auriemma’s Prepaid Compliance Roundtable, which convenes Legal, Compliance, and Risk executives for leading prepaid issuers and other market participants. Proprietary benchmarking incorporating Auriemma’s industry-standard performance, fraud, and risk management metrics will help members monitor ongoing operational impacts associated with the law.
“Practical implementation will be paramount as the CFPB moves into the final rule stage,” said Jeff Tennenbaum, Director of Business Development for Auriemma. “Now more than ever, market players need opportunities to discuss regulation and assess business impacts to ensure compliance within an aggressive implementation window.”
A proposal issued by the regulator in November 2014 drew industry criticism for its broad-brush approach, and raised questions over how policymakers will account for significant differences in features and use cases among various prepaid card types.
As drafted, the proposed rules would significantly broaden the definition of “prepaid account” and the scope of the CFPB’s jurisdiction in regulating such accounts. The rules cover increasingly popular general purpose reloadable (GPR) cards and several other account types, including payroll, government benefit, disaster relief, rebate, and certain campus and student financial aid cards. These products serve distinct purposes and vary in terms of how they function, how cardholders use them, and, for issuers, how their business models and customer relationships are structured.
“Prepaid products serve a diverse and specialized set of needs,” Tennenbaum said. “While the industry welcomes strong consumer protections, a one-size-fits-all approach to legislation could further complicate efforts to comply.”
Specifically, the proposal’s failure to distinguish between reloadable and non-reloadable cards, its error resolution provisions, and its move to reclassify certain prepaid accounts as credit products are viewed as problematic from a compliance perspective. In the long term, industry stakeholders believe the extension of credit protections could result in the elimination of certain features and services, such as overdraft. Additionally, the rule would apply the same disclosure requirements to all account types, creating new pitfalls and cost burdens.
As the industry shifts its attention toward regulatory implementation, there is mounting concern that blanket regulations will add to an already substantial administrative burden and create new risks in the form of fraud and financial loss. To track these and other related impacts, Auriemma is establishing a comprehensive benchmark in connection with the Prepaid Compliance Roundtable, expanding a suite of fraud metrics that currently cover the credit card, debit card, and consumer banking lines of business.
“While there are many open questions regarding the content of the final rules, the CFPB’s 2014 proposal suggests significant impacts are likely,” Tennenbaum said. “Issuers have already begun laying the groundwork in order to comply by the effective date and will continue preparedness actions leading up to and following the spring release.”
The next meeting of Auriemma’s Prepaid Compliance Roundtable is scheduled for May 25-26 in Chicago. For information on membership, contact Jeff Tennenbaum at (212) 323-7000.
About Auriemma Consulting Group
Auriemma is a boutique management consulting firm with specialized focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines.
Complementary to our core consulting business, Auriemma facilitates a series of Industry Roundtable groups focused on a variety of industries in which clients exchange information through activities managed by Auriemma, comparing and analyzing industry practices and benchmarks so that each member can optimize its own performance. For more information, contact Tom LaMagna at (212) 323-7000.