While Congress and the Obama administration have yet to work out details on which sectors will fall under the proposed agency's supervision, leaders of the prepaid card industry said new regulations giving force to stricter state laws would make it more difficult and costly to operate the cards nationwide. Consumer groups countered that prepaid users, who often use the payment cards in lieu of traditional credit cards tied to bank accounts, shouldn't receive fewer protections than any other card holders.
At the top of the prepaid card industry's list of concerns is a section of the Treasury Department's latest proposal for the consumer agency specifying that state consumer protection laws would trump federal laws in situations where state laws are more stringent.
The problem for the industry is that prepaid cards are a motley bunch that includes gift cards for stores like
Because some states don't distinguish between different varieties of prepaid cards, regulations imposed across the board can make it hard for certain cards to operate, said Judith Rinearson, a partner with Bryan Cave law firm representing the industry. If the new agency outlaws expiration dates, for instance, someone with a Visa-branded card might not be able to make a purchase.
"This would create a patchwork of regulations on the industry that could result in the withdrawal of prepaid products in certain states," Kirsten Trusko, president of the Network Branded Prepaid Card Association, said in a statement. Currently a 2007 appeals court ruling in the 1st U.S. Circuit Court of Appeals in
Consumer advocates said state-mandated protections would not put prepaid card companies out of business.
"The prepaid industry could take the high road and apply the strongest protection across the board," noted
The industry is also bracing for the possibility that the new agency would outlaw or sharply curtail the fees that users pay right now to buy, reload and maintain the cards.
"The bottom line is that a lot of the profitability associated with prepaid cards is in fees paid by the end users," said
The larger question may be how much regulation is necessary to protect the consumer but still encourage financial innovation, said Carol Van Cleef, a partner at Patton Boggs specializing in financial services.
"The prepaid card product may serve as a very good case study as they're trying to work out the details," she said. "It is still a developing product and it's evolving very quickly."
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