CFPB’s Proposed Prepaid Rules & Reactions

plastic cardsAfter many years in the making, the CFPB announced its proposed rules on prepaid on November 13th.  The changes proposed would extend and make changes to provisions within Reg E and Reg Z, which the CFPB has jurisdiction.

The Proposed Rules do NOT:

Make FDIC insurance (individual or pass through) for prepaid compulsory (which arguably the CFPB cannot do).

Create fee caps or other fee changes (which Congress may only do).

The Proposed Rules would:

Require “Know Before You Owe” disclosures

Expand the definition of “prepaid” to include many forms of pre-funded electronic payments methods (not just plastic prepaid cards) but does not include health savings cards and transit cards.

Extend Reg E protections on error resolution and liability limits

Extend Reg Z protections on overdraft and linked credit products

Reactions to the effects of the Proposed Prepaid Rules:

Financial services rating company-Fitch Ratings: Fitch Ratings projects that the proposed regulations “may spur a consolidation of small, high-fee prepaid issuers who may be less transparent or uncompetitive, while boosting low-cost, more transparent providers…We believe the new consumer-friendly rules should further bolster growth in prepaid card usage…We do not believe the new rules pose a serious threat to major card issuing banks.”

Prepaid Card Industry Association-NBPCA: “While the NBPCA and its member companies need time to fully digest all of the components in the CFPB’s 870 page proposed rule, we welcome formalizing many standards that the industry has already embraced…NBPCA and its members stand ready to engage the Bureau in a collaborative process to enhance consumer protections without reducing convenient consumer access to prepaid cards.”

One major prepaid card issuer-Green Dot: “Green Dot believes that its business will not be materially impacted by the CFPB’s newly proposed rules. Furthermore, Green Dot fully supports the proposed rules that mandate “Regulation E” consumer protections for lost or stolen funds and disputed transactions, including the providing of provisional credits to consumers, and the CFPB’s proposed rulemaking dealing with the new framework for overdraft programs attached to prepaid cards.”

Christopher Brown, former general counsel of NetSpend, CFPB’s Prepaid Rules Put a Freeze on the Future-“the core definitions encompass any account loaded with consumer funds on a prepaid basis that can be accessed for payments, ATM withdrawals or peer-to-peer transactions. This definition, as the CFPB acknowledges, will apply to many mobile wallets and virtual currency products.”


There will be a 90-day comment period from the time the proposed rules appear in the Federal Register.

MTA Cleanup

contract-iconCalifornia’s Money Transmission Act (Cal Fin Code Section 2000 et seq.) underwent another facelift this year.  AB 2209‘s changes were signed by Governor Brown last month, and will go into effect January 1, 2015.

Some key changes & clarifications:

1.  A Big One: Exemption for an “Agent of Payee”

“Section 2010 (l) A transaction in which the recipient of the money or other monetary value is an agent of the payee pursuant to a preexisting written contract and delivery of the money or other monetary value to the agent satisfies the payor’s obligation to the payee.”

2.  Reports required if money transmission was made by mobile device or other electronic application

Licensees must also report whether money transmission activity was made via mobile or other electronic application in addition to other reporting requirements, such as transaction volume, etc.

3.  Changes to various disclosure, notice and receipt requirements for transactions made via the web or on mobile devices.



Bad News for Banks?

bankThere were two big announcements in September that seemingly added to the dour outlook for banks:  Apple Pay and Walmart’s Checking Accounts.  But, despite previous headlines about new financial service products and services putting an end to banks, the prospect that banks are to become obsolete will not come true–at least not in the near future.  The outlook instead seems that the bigger fish will continue to play a big part in everyone’s everyday financial doings.

For example, Apple Pay has teamed up with some big players: AmEx, BofA, Wells, Chase.  Bank of America and Wells Fargo can tout they are providing easier access for its customers, without having to reinvent the wheel themselves.  A win-win for big banks.

A prepaid card leader, Green Dot, made a huge splash last week with the announcement of another partnership with Walmart–checking accounts.  Walmart ditched their efforts to become bankers bank in 2007.  Instead, they brought on the Walmart Money Card and American Express’ Bluebird, offer the ability to quickly reload a variety of prepaid cards with Rapid Reload, check cashing, bill pay, money orders–giving their customers the ability to take care of all their banking needs in-store–without holding a bank charter themselves.  Another win for this big-box retailer, and a growing leader in “alternative” banking.







Who’s Lending Anyway?

Young woman is looking through a binocularsIn commemoration of Payments Law’s one year anniversary, I’ve taken a slight departure in this post by quickly summarizing how people come up with the capital to jumpstart their companies.

Where do most (non-tech) entrepreneurs go?

Mostly likely, NOT banks:  According to the Wall Street Journal–“The number of loans for $1 million or less held by banks is down about 14% to 23.5 million since 2008. In nearly one-third of all U.S. counties, small-business lending remains below 2005 levels, estimates PayNet Inc., a Skokie, Ill., tracker of loans by banks, corporations and alternative lenders such as finance companies….Some analysts are encouraged by recent signs of a lending uptick by small banks, which often focus on small businesses. In July, the total amount of commercial and industrial loans held by small U.S. banks rose 11% from a year earlier, according to Moody’s Analytics.”

Those numbers are still very low.

Not surprisingly, “alternative” financing sources have met great success as SMBs clearly needed other sources to obtain capital.  Here’s a short list of various alternative lenders:


P2P: Prosper, Lending Club

Crowdfunding:  KickStarter

Online Payments Companies: Kabbage, PayPal Working Capital

CDFI: Opportunity Fund (only in CA) but there are CDFIs throughout the country

It’s true that the regulations that these alternative lenders may differ from traditional lenders, and may be providing loans at less competitive rates than traditional lenders.  But it seems, the tide is turning and many entrepreneurs are looking first to these non-traditional lenders.  Which begs the question: who is taking the the real long term risk: banks or borrowers?