A payments compliance rule took effect this year on April Fools' Day, and it occurred to me that when a compliance deadline is approaching, you might not feel like joking around. The Prepaid Accounts Final Rule
was issued a few years ago, in 2016, but after a number of postponements, its effective date is finally behind us.
The rule standardizes disclosures, error resolution procedures, consumer liability limits, and access to records. These changes are intended to provide comprehensive consumer protections for prepaid accounts under the Electronic Fund Transfer Act, or Regulation E. The rule is fairly comprehensive, but for the sake of brevity, I'm going to look at only a couple areas of the rule—those that stand out to me.
Consumers can now expect protections over their transaction accounts regardless of whether the account is offered directly by a traditional financial institution or by a third party, such as a fintech or merchant, as they make electronic payments (debit, prepaid, ACH). Also, fintech companies that allow consumers to store funds or are thinking about adding that ability may want to prepare themselves to be designated as prepaid services providers and therefore subject to the regulatory and licensing requirements that go along with that designation. To that point, I am not surprised to see several big names recently listed on the FinCen Money Service Business Registration as "Providers of prepaid access." (To see the list, scroll down the web page to the MSB registration form; on the MSB ACTIVITIES field, click the down arrow to open the dropdown list; select Provider of prepaid access and click the Submit button.)
Established prepaid issuers have long been preparing for the new prepaid rule despite the stops and starts of an effective date and the uncertainty about some of its key provisions. Because consumers open prepaid accounts in a variety of ways—from starting a new job to purchasing prepaid cards at a retail checkout lane—it can be difficult to accommodate the disclosure requirements, such as those for listing fees, that the prepaid rule prescribes. Most issuers have changed product packaging to accommodate the new disclosures. These changes required complicated logistics coordination for the prepaid supply chain to replace old, noncompliant inventory with new, compliant card packages. Some issuers are still grappling with how to list types of fees that may not apply to their particular account program.
Many issuers had already been providing some level of consumer protection from unauthorized transactions before the rule requirement took effect. Now there will be a standard expectation. Limited liability and error resolution benefits need apply only to customers who have successfully completed the identification and verification process, if there is one for their particular program. Regulation E's error resolution and limited liability requirements do not extend to prepaid accounts (other than payroll or government benefit accounts) that have not completed the verification process, one of the key revisions after the rule's initial issue.
The rule will change the way we categorize prepaid services. For instance, in the past, discussion around prepaid products focused on whether the product was open- or closed-loop, and whether it was reloadable or nonreloadable. While those characteristics still exist, they are not necessarily a determinant as to whether the rule applies to a particular product or not. There are clear exclusions for certain products like those that are marketed and labeled as gift cards, health care savings cards, or disaster relief cards. However, even if a product doesn't have "prepaid" on its label, it may still fall under Regulation E. Coverage extends to asset accounts that consumers can use to conduct transactions with multiple, unaffiliated merchants for goods or services, to pull cash from automated teller machines, or to make person-to-person transfers.
For both incumbents and those finding themselves new in prepaid, it has been no joke to prepare to comply with the new rule. Despite the extra burden, do you think we will look back on this milestone favorably in the future? I think the new prepaid rule will lead to strengthening trust and confidence in these products. The Consumer Financial Protection Bureau (CFPB) pledges to be vigilant in evaluating new rules. Moreover, the CFPB is required to submit a formal evaluation five years following a rule's effective date. The industry should be ready to help measure the rule's impact.
By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed