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NetSpend Sounds Alarm on Fed Proposals for Prepaid Card Products

[Saturday, April 11th, 2015]

The Consumer Financial Protection Bureau’s (CFPB) proposed restrictions on prepaid cards are cause for concern for thousands of Americans, according to NetSpend, a provider of credit products and services.

The proposed changes are designed to protect consumers from overdraft fees, but NetSpend contends that treating overdrafts as lines of credit as the rule would do, limits consumers’ ability to access funds in an emergent situation.

Many users of prepaid products are so-called “underbanked” or “unbanked” consumers, who may have difficulty opening traditional checking accounts or being approved for unsecured credit cars. Prepaid cards provide an option for them to use a card to make payments without going into debt.

With a prepaid card, consumers load money onto the card at the time of purchase and then spend it until it’s gone, at which time they need to reload the card with funds to continue using it. Prepaid products that offer overdraft protection allow cardholders to continue using their card when the funds are used up, essentially offering them a line of credit.

However, the CFPB contends that the overdraft fees and high interest rates charged by companies such as NetSpend and other prepaid product issuers unfairly target consumers who are already likely to be struggling financially. NetSpend denies this, saying the CFPB proposal would “negatively impact consumers by limiting their ability to obtain funds when they are most needed.” Calling the rules “complex, onerous, costly and difficult-to-understand,” they contend that consumers should be able to opt-in for services that allow them to access funds when they need them.

More than a quarter of households underbanked

The FDIC has found that 28% of American households use “alternative financial sources” rather than traditional bank accounts. This may be because they want to avoid bank fees, or because they don’t have enough income to secure a bank account. Underbanked households are more likely to include minorities, people with low incomes, and young people.

Unpredictable income is another issue that can lead people to access short-term credit. More than 30% of Americans have irregular income due to seasonal work, unemployment, or erratic work schedules, according to the FDIC.

The proposal was presented to the public last November, and a 90-day period of public comment followed its unveiling. NetSpend said that their overdraft protection is designed to protect consumers, giving them safeguards like a 24-hour grace period before a fee is charged, fee caps, and a $10 buffer to prevent accidental overdrafts.

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