Prepaid payment product use has grown dramatically in recent years. While traditional prepaid products continue to see increased use, the market for prepaid mobile wallets, person-to-person payments and electronic prepaid accounts are among the fastest growing consumer financial products in the United States. In fact, in introducing its final rule on prepaid accounts this month, the Consumer Financial Protection Bureau (CFPB) cited a 2015 (updated in 2016) Board of Governors of the Federal Reserve System survey entitled “Customers and Mobile Financial Services,” which reported that 15 percent of mobile payment users stated that they used an account at a nonfinancial institution such as PayPal to fund their payments. It is estimated that by 2018, consumers are expected to load over $121 billion onto payment devices and prepaid cards — nearly double the amount of funds loaded onto prepaid accounts four years ago.
As the use of these prepaid products has risen, so have consumer complaints. Since 2011, the CFPB has received thousands of complaints about prepaid cards, the bulk of which relate to unauthorized transactions; fraud or scams; and managing, opening and closing accounts. These complaints prompted the CFPB, in part, to issue a final rule to regulate prepaid payment systems (“Prepaid Rule”). The Prepaid Rule takes effect on October 7, 2017.
Scope of the Prepaid Rule and Requirements
The CFPB issued its Prepaid Rule amending Regulation E (Electronic Funds Transfer Act) and Regulation Z (Truth in Lending Act) to create regulations for prepaid products. The Prepaid Rule enlarges the definition of “account” under Regulation E to include “prepaid account,” subject to certain exclusions (i.e., health savings accounts, gift cards or gift certificates as defined by statute, and digital wallets which store consumer payment information). The CFPB recognizes that there are significant variations in how funds are held, particularly in digital and mobile wallets, and that payment processing by digital and mobile wallets is evolving quickly. The CFPB’s Prepaid Rule also recognized that requirements for newer prepaid products such as digital and mobile wallets were less clear under existing regulation. As a result, the Prepaid Rule seeks to fill this regulatory gap by addressing the electronic nature of prepaid accounts.
The Prepaid Rule addresses four categories of prepaid accounts:
- Payroll card accounts currently subject to Regulation E,
- Government benefit accounts currently subject to Regulation E,
- Accounts that are “marketed or labeled as ‘prepaid'” that are redeemable at various merchants or usable at ATMs and
- Accounts that are issued on a prepaid basis or capable of being loaded with funds, whose “primary function” is to conduct transactions with various merchants, ATMs or person-to-person transfers.
The CFPB recognizes that not all prepaid products and services are tied to a physical card or device and, as a result, all of these categories of prepaid accounts also include virtual general purpose reloadable cards or accounts.
Disclosure and Electronic Form Requirements
The Prepaid Rule establishes short-form and long-form disclosure requirements that customers must receive prior to acquiring a prepaid account. The CFPB has made clear that during pre-acquisition, it is imperative for consumers who acquire a prepaid account online to see the relevant disclosures in electronic form. These pre-acquisition disclosures can be provided without ESIGN consent — although this ESIGN exception does not extend past pre-acquisition disclosures or apply to disclosures in general. The Prepaid Rule provides clarifications and guidelines for these electronic disclosures. Specifically, the Prepaid Rule requires that these pre-acquisition disclosures are:
- Provided in electronic form,
- Viewable across all screen sizes and
- Provided in a manner that is reasonably expected to be accessible in light of how a consumer is acquiring the prepaid account, in a responsive form and using machine-readable text accessible via web browsers or mobile applications as applicable and via screen readers.
Under the Prepaid Rule, the CFPB made clear that customers should be able to access the pre-acquisition disclosures on the first page (or via a direct link from the first page) of the website or mobile application. Companies should ensure that the electronic disclosures are easy to locate, viewable regardless of the electronic method used, easily accessible and readable by internet search engines or other computer systems.
Recognizing that providing detailed disclosures can be a challenge on smaller electronic devices, the CFPB has indicated that electronic disclosures can be provided in a way that accommodates consumers viewing on small screens by stacking those disclosures so as to respond to smaller screen sizes while still meeting the formatting requirements under the Prepaid Rule. The CFPB’s source code for web-based disclosures provides an example of stacking — making it clear that virtual and digital prepaid account products will receive the same scrutiny as traditional prepaid account products.
The Prepaid Rule, which is comprised of nearly 1,700 pages, contains broad requirements and significant disclosure requirements in addition to those discussed above. Given the scope of the Prepaid Rule and the interrelationship between the amendments to Regulation E and Regulation Z, both tech-savvy and traditional prepaid card companies should carefully scrutinize the Prepaid Rule, analyze the company-specific needs and requirements and initiate compliance plans as soon as possible to meet the October 2017 effective date.