"I came here to drink milk and kick ass. And I've just finished my milk." - Moss, The IT Crowd

Thursday, June 16, 2011

Setting the Record Straight on Prepaid, Part 1

This blog post will be a departure from what I’ve written so far. My two rules to date have been (1) no discussions about my work and (2) no discussions about my personal relationships. However, I’m going to bend Rule # 1 a bit today.

See, I’ve worked for several years in prepaid debit cards, although I’m not employed in the industry currently: my work primarily involved general-purpose reloadable cards, or “GPR” cards, sold directly to individual consumers. I’ve had a bunch of different roles, but most recently my job responsibilities involved analyzing legal and regulatory compliance issues. Regulation in the prepaid space is not normally a topic I’d opine on in a public forum, but I feel like I need to counteract some of the misinformation that is being propagated in news coverage of the prepaid space.

[Full disclosure: My spouse and I own shares in two companies in the prepaid industry. However, I’m not an uncritical booster of GPR cards as an ideal solution for everyone who can’t afford to keep a minimum balance at a national bank in order to avoid monthly service charges; a significant fraction of these individuals would be better served with a checking account at a local credit union. I do believe, though, that there is a substantial portion (possibly the majority) of the unbanked population in the U.S. for whom reputable GPR card programs provide an incredibly useful and relatively inexpensive alternative to carrying cash. GPR cards can also be useful in a variety of scenarios for people who have bank accounts. However, the usefulness of GPR cards is a topic for another time.

I’m also not an attorney, a federal or state regulator of any type, or a CPA; the contents of my blog should not be construed as legal advice. (Just in case the word “blog” didn’t already clue you in.) I am not receiving any compensation for posting this article.]

What misinformation?

The article that finally spurred me to write this post was Pallavi Gogoi’s piece published on June 15, 2011. Ms. Gogoi currently writes for the Associated Press, and has formerly written for Bloomberg BusinessWeek and Dow Jones News. While I have no doubt that she knows far more about the financial sector as a whole than I do, I need to correct some of the statements that Ms. Gogoi presents as fact in yesterday’s article. I’m not trying to single out Ms. Gogoi for criticism here, since I’ve seen similar misstatements made in other articles published by respected sources. But it’s time to set the record straight, and I want to thank Ms. Gogoi for finally motivating me to do it.

OK, let’s get down to specifics. I think much of the confusion in Ms. Gogoi’s article arises from a failure to fully appreciate the distinction between non-reloadable prepaid cards (effectively, gift cards) and GPR cards, and the differences in how they are regulated. Ms. Gogoi contends that prepaid cards offer “Few of the consumer protections afforded to bank and credit card customers.” If she is speaking of GPR cards, which appear to be the subject of her article, this is incorrect for all of the GPR products with which I am familiar.

There are two specific sets of protection which apply to GPR cards which generally do not cover non-reloadable prepaid cards: FDIC insurance and Regulation E. Ms. Gogoi acknowledges that FDIC insurance applies to GPR cards (and I’ll explain later why FDIC insurance covers GPR cardholders even though they don’t have traditional bank accounts). However, her presentation of the way fraudulent charges are handled implies that Regulation E, which provides certain consumer protections from liability for fraudulent charges, is applied differently to GPR card accounts than to traditional bank accounts.

Not so. Regulation E most certainly gets applied to GPR card accounts, and is the fundamental reason why GPR cardholders have recourse in the event of fraudulent charges. By contrast, Regulation E generally does not apply to non-reloadable prepaid cards: because non-reloadable cards cannot have additional funds placed on them and because the cardholder’s identity is uncertain, non-reloadable cards are not treated as “accounts” by regulators for the purposes of Regulation E. Thus, you may not be able to get the issuer of your non-reloadable card to reimburse you for fraudulent charges if someone stole your non-reloadable card or skimmed the card number. GPR cards, which are the type of prepaid cards covered in Ms. Gogoi’s article, are an entirely different ball of wax.

Go to Part 2.

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