NYPAY: Regulation Prepaid

Last week, DWT Consumer Financial Services team member Tom Scanlon spoke at the June NYPAY panel titled, “Regulating Prepaid: Balance Between Protecting Consumers & Promoting Payments”. NYPAY is a New York-based forum for innovators and leaders in the payments and mobile commerce industry. The recent panel was part of a series of NYPAY events hosted by DWT and other New York law firms. DWT continues to monitor developments on prepaid issues, including the Consumer Financial Protection Bureau’s proposed prepaid account rule and the interplay amongst prepaid cards, new technologies, and emerging payment systems.

Tom was joined on the panel by Alex Gasner, Co-founder, One Financial Holdings; Barry Kessler, General Manager Reloadable Product, Praxell; and Brad Fauss, CEO, Network Branded Prepaid Card Association. Cristienne Genaro, Partner at Paygility Advisors, moderated the panel.

The panelists discussed the CFPB’s proposed prepaid account rule and key implications for the prepaid payments industry if the rule were to be implemented as proposed. The panelists highlighted three areas in which the proposed rule (if adopted providing substantively similar terms and requirements) could prove problematic:

1. What’s a “Prepaid Account?” The panelists noted that the proposed definition of “prepaid account” does not adequately demarcate the difference between a “prepaid account” and other types of accounts (say, a checking account, with funds accessible through use of a debit card) currently covered by Regulation E.
2. Extension of Regulation Z’s Disclosure Requirements. The panelists expressed concern about the proposed rule’s extension of certain Regulation Z provisions to prepaid products that offer overdraft features, including unintended overdrafts known as forced-pay transactions. The panelists observed that, in forced-pay transactions, a prepaid account issuer may not be able to prevent overdrafts. Consequently, a broad swath of prepaid account issuers could be subject to Regulation Z even if the products offered do not expressly contain an overdraft feature. At least one panelist was optimistic that the CFPB may further refine these provisions in the final rule.
3. Excessive Disclosures. The panelists identified the proposed rule’s disclosure requirements as particularly onerous. Attendees and panelists debated the costs and benefits of disclosures for consumers, including thoughtful discussion of behavioral economics and whether the short form / long form disclosures in the rule will actually help consumers.

The panelists agreed that a final prepaid account rule will benefit the industry by providing more certainty in connection with the development of new products, but cautioned that compliance with certain aspects of the rule is likely to stifle innovation. The CFPB is expected to release a final prepaid account rule later this summer. Please revisit paymentlawadvisor.com re developments in connection with the rule.