In Its Face-Off With the FTC, NetSpend Argues It’s Following the Rules

NetSpend, the prepaid card unit of processor Total System Services Inc. (TSYS), is facing a Federal Trade Commission lawsuit filed Thursday over allegations the company deceptively marketed reloadable debit cards.

The suit, filed in the U.S. District Court for the Northern District of Georgia, alleges NetSpend promised “immediate access” to funds loaded onto cards and “guaranteed approval,” but failed to provide that for many consumers.

“Ultimately, many consumers have not been approved, and have lost funds already placed on the cards,” the lawsuit says. Additionally, access to funds for many was delayed, the FTC says. Other consumers were unable to activate their new NetSpend cards, and some saw their balances depleted as inactivity fees were assessed, the suit says. The FTC says NetSpend failed to provide provisional credits to users for account errors, despite saying it would.

The FTC says thousands of consumers have complained about the prepaid card practices to government agencies, the Better Business Bureau, and NetSpend. The number of affected accounts is known to the FTC but is not publicly available because NetSpend claims the information is confidential. The tally may be revealed following a court decision on an FTC motion to disclose the numbers, Mark Glassman, at FTC attorney, tells Digital Transactions News. A date to hear that motion has not been scheduled yet.

The suit claims NetSpend’s advertising messages emphasize the immediate use of NetSpend cards and access to funds loaded onto the cards. The FTC wants the court to rule that NetSpend halt these practices.

NetSpend, in a statement, says it will “vigorously contest this complaint and had substantial defenses to do so.” The company had no comment beyond the statement.

NetSpend asserts in the statement that the complaint is about whether consumers were deceived because of NetSpend’s compliance with its obligations under the USA Patriot Act, which requires confirming the identity of consumers getting a prepaid card. “NetSpend takes seriously and carefully adheres to these legal mandates to fight identity theft, money laundering, and terrorist financing and believes that no one was deceived or harmed by the company’s compliance with these legal obligations,” the statement says.

NetSpend also says its action on fraud controls are required by federal law and the FTC’s Red Flags Rules, which require companies to identify and respond to possible instances of identity theft. “These processes are not deceptive, but instead comply with the law and protect consumers,” NetSpend says.

The FTC’s Glassman says this NetSpend argument ignores that many consumers can’t comply with the activation process and then can’t get access to funds.

NetSpend, like any other company offering financial-services accounts, must collect the consumer’s name, date of birth, address, and identification number, such as a Social Security number. “They have to verify these things are legitimate and connect to the consumers providing the information to prevent fraud and identity theft,” Ben Jackson, director of the prepaid advisory service at consultancy Mercator Advisory Group Inc.

“One of the big struggles here is what constitutes immediate access,” Jackson says of the FTC’s complaint. “Some prepaid card companies do not offer any access to ATMs or reloads until they verify the information, but they do let cardholders make purchases,” Jackson says in an email. “NetSpend has to balance access with its duty to verify the customer’s identity.” Generally, prepaid card managers are averse to freezing access to funds because they make money from consumers being able to use their cards, he says.

The FTC complaint may also be an instance of one regulatory agency attacking a private business for doing its best to follow the rules of another regulatory agency, Jackson says. “If that is the case, then we need to find a way to rationalize the expectations on these companies or it will be a lot harder to offer financial services.”