By Jessica Holzer
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- The U.S. prepaid card industry fears that legislation to create a new Consumer Financial Protection Agency will wind up shutting down a key distribution channel for prepaid reloadable cards.
A draft bill would allow the new agency to designate the sale or issuance of such cards as a "deposit-taking" activity - a change the industry says could bar them from being sold anywhere but a bank.
The cards typically cater to those who don't use the banking system or who are seeking a budgetary tool. People can buy and reload them at Wal-Mart (WMT), Safeway (SWY) and other retailers and then use them to shop wherever the cards, which are branded as part of card network such as Visa (V) or Mastercard (MA), are accepted.
"This new law would create a serious impediment to financial inclusion for the millions of unbanked consumers who have come to rely upon prepaid cards for carrying out their day-to-day transactions," the industry's main trade group wrote in a letter Monday to House Financial Services Chairman Barney Frank, D-Mass.
The concern is that, notwithstanding lawmakers' intentions, the language in the bill would prompt individual states to prohibit prepaid card sales at retail locations, said Terry Maher, counsel to the Network Branded Prepaid Card Association. The bill could also affect the sale of gift cards by retailers as well as the processing of payroll cards used by employers, he said.
"We don't think the chairman was intending this to occur," Maher said.
Frank spokesman Steve Adamske said the legislation isn't meant to bar retailers from distributing the cards. Rather, the aim is to protect consumers against "any industry shenanigans" by allowing the new agency to oversee the third parties that sell the cards, he said.
"What we're trying to do is make sure the consumer is protected against higher fees or abusive practices if the institution is serving as a financial middleman," Adamske said. Gift cards issued by retailers wouldn't be affected by the legislation, he added.
Prepaid reloadable cards are a small but quickly growing industry that is beginning to attract greater scrutiny in Washington. The Federal Reserve is currently reviewing its role in regulating the cards.
Roughly 100 million prepaid cards have been issued since the product entered the marketplace 12 years ago, the industry estimates, and growth has picked up substantially in recent years. There are now around 200,000 retail or other nonbank locations, including on the Internet, where people can buy or reload the cards.
Consumer advocates are concerned the cards do not come with the same standardized protections against fraud that debit cards linked to deposit accounts have. They also claim the cards often do not come with clear disclosures of the fees charged.
"To obtain a full listing of the fees is very difficult," Michelle Jun, a staff attorney with Consumers Union, argued.
The industry notes that the cards, though they are sold by retailers, are issued by highly-regulated banks that work with the retailers to set the fees and determine how they are disclosed.
"The issuing banks of these products have extended very generous consumer protections with these cards," Gary Palmer, chairman of the industry trade group, argued.
He said it was important to look at the products in the context of other options available to people on tight budgets or without access to traditional banking services.
"Consumers see the benefits of prepaid cards versus cash and low-balance checking accounts," he said.
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com