US federal proposals released on Nov. 13 that would tighten regulation of the prepaid card market may spur a consolidation of small, high-fee prepaid issuers who may be less transparent or uncompetitive, while boosting low-cost, more transparent providers, according to Fitch Ratings.
The proposals include new standardized fee disclosures, billing statement guidelines, payment cycle terms and limits on fees.
We believe the new consumer-friendly rules should further bolster growth in prepaid card usage by enabling consumers to more easily make informed decisions on card fees and features. Among the many prepaid issuers in the US, fee structures can vary widely and standardized disclosures may push consumers toward lower cost, greater feature providers.
We do not believe the new rules pose a serious threat to major card issuing banks, given underlying prepaid customer demographics and actions taken by banks to offer their own prepaid cards. In fact, according to Card Hub's 2013 Prepaid Cards Report the prepaid cards offered through five large banks including American Express, Chase, US Bank, PNC and BB&T carried significantly lower fees than other cards, reflecting banks' ability to leverage their broader scale, infrastructure and marketing to drive more favorable economics for both the card holder and the card issuer.
The market opportunity in prepaid cards is significant and the industry has already become one of the fastest growing segments of the financial services industry, expected to garner $100 billion in transaction volume in 2014. Prepaid cards have exhibited outsized growth and high usage rates among "unbanked" consumers, defined as those without a traditional bank account. According to a recent FDIC study, about 27% of the US unbanked market has used a prepaid card, up from 18% just two years ago.
Prepaid card account consumers are gaining new protections that move the cards nearer to having the same disclosure and reporting protections that credit card users enjoy. Examples of the protections and features include monthly statements with a history of transactions and fees paid, 21-day post-cycle payment terms, and practical ways tonthly statements with a history of transactions and fees paid, 21-day post-cycle payment terms, and practical ways to fix billing problems. The total fees paid for prepaid credit products would not be allowed to exceed 25% of the credit limit. In an effort led by the Consumer Finance Protection Bureau, the protections would be promulgated under US Electronic Fund Transfer Act and The Truth in Lending Act of 2009.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.