Digital Transactions Authoritative, insightful and timely information for payments professionals
When on June 29 the Federal Reserve Board issued its final rule implementing the Durbin Amendment to the Dodd-Frank Act of 2010, issuers had some cause to heave a sigh of relief. As stringent as the Fed’s debit card interchange caps were for issuers above $10 billion in assets, the 21-cent maximum (plus 0.05% and maybe a penny) was at least better than the draconian 7-to-12-cent limit the Fed set out in its original December proposal.
But buried in that June rule was a much less enticing—and entirely new—provision, one that could prove to be a hammer blow for prepaid cards, one of the industry’s fastest-growing businesses. At the very least, the new provision could end up putting larger banks on the sidelines while smaller competitors cash in on the growth.
To see why, think back to that original Fed proposal, the one that came out 10 months ago. Reading this document, banks with $10-billion-plus in assets concluded that general-purpose reloadable prepaid cards (GPR, in industry shorthand) were exempt from the interchange limits so long as the cards didn’t carry overdraft fees and allowed the first ATM transaction each month to be free to the cardholder.
But with its final rule in June, the Fed added a third, and entirely unexpected, twist: The cards themselves must be the only means of accessing the underlying funds. No ACH transfers. No bill-payment features. Such features are common, and popular, add-ons for GPR cards, as they increase the product’s versatility and give cardholders, many of them underbanked, the ability to maintain an account with at least some of the trappings of a demand-deposit account.
Now it will be much harder for big banks to issue these cards and stay competitive with smaller banks, which often work with non-bank program managers to sponsor attractive features. And that could have an unfortunate impact on a vibrant business. General-purpose prepaid card transactions grew four-fold, from 300 million to 1.3 billion, between 2006 and 2009, according to the Fed’s latest Payments Study. Transactions for the entire prepaid category grew at 21.5% annually in that time, from 3.3 billion to 6 billion, with the general-purpose sector’s share soaring from 9% to 22%.
If GPR suffers, though, don’t blame the Fed. The regulator needed to plug a gaping loophole that could have allowed big issuers to evade the interchange caps by converting debit portfolios to GPR. Whether any banks would have done this remains an open question. What is clear is that the real blame, again, attaches to an ill-advised law that substitutes fiat price controls, with all their unintended consequences, for the workings of the private market.
John Stewart, Editor
john@digitaltransactions.net
