If there is one widely shared goal amongst prepaid service financial providers it’s to show consumers that these accounts can substitute or at least heavily complement traditional banking services. But to do that, card providers must prove that the days of fleecing customers with hidden fees are over.
With this in mind, the Center for Financial Services Innovation (CFSI) has proposed proactive measures that providers can take to more clearly disclose fees for general purpose reloadable cards. So far, a handful of early adopter providers, including Green Dot, Plastyc, and Ready Credit, are already trialing the proposed “standardized fee box.”
Consumer advocates applaud the initial steps toward clearer fee disclosure, but say that the measures may not go far enough. They’d like to see a limit on the kinds of fees that can be charged, as well as further government regulations that ensure banking-style protections for prepaid consumers.
Why a New Fee Box Now?
CFSI’s proposed fee box is the result of years of consumer research and was released as part of a report called “Thinking Inside the Box: Improving Consumer Outcomes Through Better Fee Disclosure for Prepaid Cards.” Specifically the report calls for providers to take a few consumer-protection measures that include making fee disclosure language simpler for users to understand, designing fee boxes that are visually clearer, and consistently placing these boxes in the same location on either packaging or websites so that consumers know where to look.
While CFSI has been researching prepaid disclosure for a decade, the organization’s policy manager David Newville says extending consumer protection for prepaid customers now is key to shifting prepaid financial services into the mainstream instead of just allowing them to serve small niche markets of the disenfranchised or underbanked.
“The Treasury Department is going electronic with benefit payments, the IRS is testing tax returns on prepaid cards. We’re seeing prepaid cards as financial inclusion for the underbanked and also much more [as these trials take hold],” said Newville. “If prepaid is your main source of money and there are no protections, that could really do a lot of harm.”
Easy-to-find fee disclosure boxes are essential to helping consumers understand that buying a prepaid card should be considered part of a serious financial choice in the same way choosing a bank would be, said Anisha Sekar, vice president of credit and debit products at NerdWallet, a personal finance search site that provides research for consumers on a host of prepaid and credit card products.
“A great number of these cards are purchased in stores next to gift cards. Who is really searching for fee disclosure if you’re not expecting this to be a major financial decision?” said Sekar. “This makes a great step toward communicating to consumers that this is an important financial product.”
Fee Disclosure Boxes Help Consumers, but How About Providers?
Until now many providers saw the institution of extensive fee disclosure and other regulations as a way of tamping down on innovation, said Newville. Meanwhile, others believed “too much information” would confuse consumers and potentially repel them.
But once enough scandalous stories ran about hidden prepaid fees, some providers realized quickly they might have to change. The trick to this is a disclosure strategy that helps both providers and consumers in striking a balance between simplicity and comprehensiveness, CFSI’s report says.
“Trying to accomplish everything within the box can be counterproductive, reducing the box’s overall effectiveness,” the report reads. “The Federal Reserve has found that including too much information in disclosures can distract consumers from what’s most important.”
So CFSI set forth recommendations on the types of fees that should be listed in these boxes. Companies should avoid cluttering the box with fees that are very uncommonly used, while populating the space with those that are either most common or most expensive. The problem is, each company has to decide this for themselves, because depending on the provider, different fees are used to support very different features.
“When designing the boxes, we found that of the 36 programs… there were 43 different types of fees, but sometimes there was little overlap among the types of fees that programs charged. We believe this shows that there are diverse groups of consumers and different products are tailored to different consumers in different ways,” says Newville. This means that each company must identify which are the most common fees.
Once companies choose the fees that are most likely to occur for the main disclosure box, they can then place other fees in a separate location that customers can opt into, Newville said. On a website that would mean placement of the major disclosure box on the homepage, while the more complete box would go on another click-through page. In a physical retail location, the main disclosure box would go on the card itself or the package, while a secondary box with more fees would reside on a separate piece of paper inside.
One Provider Gets High Tech with Disclosure
For prepaid debit card provider Plastyc, the answer to clearer disclosure comes in the form of a fee calculator tool. Plastyc publishes some disclosure boxes with an extra column in which users can estimate the monthly occurrence of a feature that is linked to a fee and then estimate how much cost they will incur.
“This helps people figure out the cost of ownership on the card,” said Patrice Peyret, CEO of Plastyc.
The company also created an interactive tool online that makes the process even easier.
“A couple of months ago we began publicizing a fee calculator where people can enter their own estimates on how frequently they would use direct deposit, ATM withdrawals, etc. and then they can press a calculate button and it will give them the cost. Right now it’s on one of our two websites,” Peyret said.
Going forward, Plastyc may even incorporate mobile applications in fee disclosure by allowing consumers to request fee information through text alerts.
“We’re looking forward to using mobile applications to send alerts in a programmable way,” said Peyret. “Most providers will send low balance alerts, but not much else. In our case, people will be able to decide which alerts they receive. They’ll be able to tell when an employer deposited money or when they’ve received money from someone else.” They could use these alerts to track fees associated with various features.
Plastyc became an early adopter of fee disclosure techniques in order to enhance consumer trust and loyalty.
“We deal with low income customers as the core of our audience, and the number one source of anxiety in their lives is their money. I joke that we are in the financial anxiety reduction business,” said Peyret. “If customers feel that we are transparent and honest, they will trust us more. If we are successful it will be measured by how much less anxious they will be. Fee disclosure is one step in building trust.”
Consumer Advocates Say Disclosures are Good but Could be Better
Disclosure boxes are a great start, according to NerdWallet’s Sekar, but she’s still concerned that these boxes don’t reveal enough. What’s more, fee disclosure should be accompanied by other consumer protection measures and enforced through government regulation.
“This still falls short because there is no regulation on which fees need to be included [in disclosure boxes],” said Sekar. Even worse, “there is no limit on the kinds of fees providers can charge. You can create some arbitrary fee that wouldn’t be disclosed,” she said.
Also there is a real difference in opinion on which fees are important enough to include in the main standardized fee disclosure box. For example, while Newville mentioned foreign spending fees as one less commonly used charge that may not need to go in the main box, Sekar mentioned the same fee as a very common hidden charge. That could vary depending on the card. For cards that are targeted toward immigrant workers, who may cross the border into Mexico regularly, this could be a larger problem.
“Regulators need to step in about putting limits on what kinds of fees can be charged,” Sekar said. “Disclosure and regulation need to go hand-in-hand. The prepaid industry has a number of issuers who want the best for their consumers and do have best practices, but then you have the Kardashian cards of the world.”
Currently there is legislation working its way through the Senate that would enforce prepaid transparency, but in the meantime, Sekar says the Consumer Financial Protection Bureau (CFPB) can work on such regulations since the agency has the ability to regulate non-banked based financial services. CFSI has asked the CFPB to do consumer testing around the new disclosure measures, but Newville notes that could be a lengthy process.
“The regulatory process is a long one. They have to take in comments … the process could take two to three years. We think there’s no reason not to start this immediately. We will do research on what is working and what’s not working,” said Newville.
Yet Newville also acknowledges that self-imposed fee disclosure is not the end-all in prepaid consumer protection. In fact, last summer CFSI released a paper that showed three elements of necessary prepaid consumer protections, including: extending FDIC insurance to prepaid accounts, extending Regulation E (or electronic fund transfer protections) to payroll cards, and implementing more extensive fee disclosure in prepaid cards.
Attitudes Shifting, Competition Spurs Honesty
While all disclosure rules take shape, providers that understand hidden fees could hinder their business are already beginning to strategize where they will find their margins.
“Providers have to change where they are looking to make money [from disclosure fees] to interchange fees or by using prepaid cards as an entree [for consumers] into other financial products.” said Sekar.
The good news is that as a core group of providers become more transparent in their fees, and consumers learn to look for these cards, other providers may feel compelled to change their ways.
“That’s going to put competitive pressure on other providers,” Sekar said.
That’s the kind of change that could really help make prepaid cards a banking substitute. •