Federal agency wants to extend rules to the popular reloadable cards.
The government's new consumer watchdog is moving to regulate one of the fastest-growing types of prepaid cards, which millions of households use instead of debit cards and traditional bank accounts.
The Consumer Financial Protection Bureau said on Wednesday that it is considering extending federal standards that govern automated teller machines and other financial services to the cards. New rules could require more disclosures about fees and terms, or protections if the card gets lost or stolen.
Consumer advocates, who have been pushing for greater protections on this increasingly popular type of card, applauded the move, although some said it doesn't go far enough. "It's about time," said Michelle Jun, senior attorney with Consumers Union. "We've been asking for this for years."
The general purpose cards are sold directly to consumers, carry a network logo such as Visa and can be reloaded with more money. Most don't offer "overdraft" features, with those that do charging overdraft fees.
Demand has exploded, with the market shooting from $12 billion in 2007 to $40 billion last year, according to Maynard, Mass.-based Mercator Advisory Group. Mercator expects the market to double this year, hitting $82 billion, and big financial players such as Minneapolis-based U.S. Bank are jumping into the business.
"The people who use prepaid cards are, in many instances, the most vulnerable among us," bureau director Richard Cordray said in a statement. "Yet right now prepaid cards have fewer regulatory protections than bank accounts or debit or credit cards."
The bureau's move would extend "Regulation E," which offers a number of consumer protections on electronic fund transfers.
The bureau is seeking feedback on its proposal through July 23 but probably won't propose an actual rule until early next year.
Players in the prepaid industry offered lukewarm support for the idea, but they are likely to push back on aggressive changes to product features, some said.
The CEO of NetSpend Corp., a top prepaid-card issuer based in Austin, Texas, said his company is already highly regulated at the state and federal levels. In a statement at a bureau hearing on the proposal Wednesday in North Carolina, NetSpend CEO Daniel Henry said he hopes the bureau will "avoid substantive product limitations in a way that hinders innovation and competition in an extremely dynamic industry.
"Limitations on the products, such as restrictions on the types of fees that can be charged, will only harm consumers," Henry said.
According to Mercator, the Top 3 general purpose prepaid card issuers are: Green Dot Corp. in Monrovia, Calif., NetSpend and H&R Block Inc., the tax preparer based in Kansas City, Mo.
The industry initially targeted lower-income people who use banks sparingly or not at all and use the cards as a substitute for a checking account, Mercator senior analyst Ben Jackson said.
But the appeal is broader, he said, and the industry is now marketing the cards to younger people and college students.
"The middle class has always kind of used these," Jackson said, "and the industry is starting to catch up with that."
American Express Co., for instance, introduced a general purpose reloadable prepaid card about a year ago. Wells Fargo Bank started offering its own card in March, and U.S. Bank introduced one last fall.
U.S. Bank declined to comment on the proposed rulemaking. A Wells Fargo spokeswoman said the bank supports consumer protections.
Lauren Saunders, managing attorney at the Boston-based National Consumer Law Center, called the proposed changes "an important first step."
She urged the bureau to go further to require prepaid-card issuers to hold consumers' funds in insured institutions such as an FDIC-insured bank. She also encouraged the bureau to ban overdraft fees and credit card-type features on prepaid cards.
"Prepaid cards should be prepaid," Saunders said. "They need to be a safe alternative to bank accounts."
Jennifer Bjorhus • 612-673-4683