How to Regulate Prepaid Cards and the JOBS Act

19 | By Shah Gilani

A few weeks ago, I wrote about how prepaid cards are proliferating, that American Express and Walmart had come out with a no-fee card called Bluebird, and not everything is as it seems.

You all chimed in with lots of great comments, including some that questioned what I really had against prepaid cards, especially if they are “no-fee” cards and serve those with less-than-average wherewithal (wherever that descending measure is these days) who rely on them for everything from consumer transactions to bill paying and ATM access.

First of all, let me say that I think prepaid cards are good. They’re not great, but I hope they get there.

But I want to talk about what’s not great, and how to make prepaid cards better.

I told you about the interchange fees that are charged to merchants and how those end up being passed along to consumers. Maybe that’s not such a big deal if we can quantify their additional cost on a per-item basis. All I’ll say about that is, it adds up.

My problem with prepaid cards is what we can’t see about them.

What’s going on behind the scenes? Do they offer adequate protection to their users? Is the proliferation of them going to present some systemic risk? How should they be regulated?

Regulation? I know what some of you are thinking. We have too many regulations as it is, and the regulators are all asleep at the wheel anyway, so regulation is the problem not the answer.

I agree with you, but not exactly. You’ll see what I mean.

Protection for the “Unbanked”

For me, the bottom-line with prepaid cards is that the folks that use them need protection.

That’s because the people using prepaid cards are an increasing lot of less than flush folks who don’t have an adequate voice in their own affairs when it comes to their financial transactions.

The Federal Reserve recently came out with some interesting data and I owe American Banker (a great publication, by the way) for bringing it to light in a recent article.

A Fed survey showed that there are some 17 million “unbanked” adults in the U.S., up from 14 million in 2009. About 10% of adults use prepaid cards, about the same as in 2009.

But usage of prepaid cards by those unbanked adults increased from 12% to 18%. And perhaps more telling (of a few unfortunate themes) is that of those people who dropped out of the traditional “previously banked” category, use of prepaid cards rose from 19% of them to 27%.

Meantime, prepaid card usage declined among the “fully banked” from 8.1% to 7.3%.

I’m not going to jump to random conclusions about how some of this is proof that the rich are getting richer and the middle class is getting poorer. Of course not. I’m not the kind of guy to say I told you so, but if I was, I’d sure be saying it now.

My point is the increasing category of prepaid card users needs more protection.

People who buy prepaid cards don’t get any interest on what are essentially “deposits.” Don’t bother with the fact that interest is non-existent now; that will change eventually. Their money isn’t protected by the FDIC unless it’s a bank-issued card, and even then, there are ways that banks can issue cards outside of those protections.

Meantime, the “sponsors” of these cards are collecting your money and banking it in FDIC-insured banks before you spend it. Or maybe they’re investing it to make an interest rate spread somewhere, or speculating with it to make huge profits for themselves. There’s nothing stopping them, really.

That’s my point. Prepaid cards are bank accounts, however you look at them. You know the old litmus test. If it walks like a duck; if it quacks like a duck; if it [rhymes with spits] like a duck… IT’S A DUCK.

Prepaid card users need prudent regulatory protections. We all need prepaid cards to be prudently regulated before they grow so big and implode somewhere that reverberates through the economy and we all say “Here we go again.”

Regulating the JOBS Act

Next up, because it’s about regulation, let me tell you about something that just happened that you may not know about.

Mary Shapiro is stepping down from the top post at the Securities and Exchange Commission. You knew that.

What you may not know is that some emails have surfaced (they didn’t just surface, she was “outed”) where she wrote internally that she didn’t want to do away with a three-decades-old protection (parts of Rule 506) that has served investors and the public very well. The emails are controversial, not because she was looking out for the public’s welfare (far be it from her to think about the public), but because she said she was concerned about her legacy.

Yes, Mary Shapiro wrote that she was concerned about her legacy if she was to allow old investor protections to be stampeded by pimping and pandering legislators who rammed through the JOBS Act back in April, and wanted her to roll over and let them steamroll her.

The powers that be wanted the SEC Chairwoman to not bother with putting out a controversial aspect of the JOBS Act for public comment, but to exercise her powers to just make it happen.

It sounds simple enough. The JOBS Act calls for the lifting of a prohibition (Rule 506) on “general solicitation,” whereby folks could finally advertise that they were looking for money to start a new businesses, or advance an existing businesses, or just rip-off whoever would read their wild pitches and send them money.

Shapiro didn’t send out the proposed changes to Rule 506 for public comment, which is almost always the norm. She sat on the rule changes, got a change of heart and put them out for comment this past summer. That infuriated a bunch of Republican lawmakers (and some Dems, too) because she didn’t ramrod their legislative wishes down the public’s throat.

For heaven’s sake, the woman was only trying to do her job. Not that she’s always on top of her portfolio all the time, she hasn’t been. But, heck, that’s a crazy job with pigs and panderers and bankers and legislators (same thing) all over the Commission to get their schemes approved, or for the SEC to turn their backs while they steal what they can from whomever they can tee-up.

But I digress.

The point is, changes to Rule 506 don’t have to be delayed.

Like the kind of regulation that is needed for prepaid cards, it should be simple and in black and white.

The problem with regulations in America isn’t that there are too many. It’s that they are too wordy (for the purposes of allowing loopholes).

We need to revisit a lot of regulations. We need to cut them down to black and white rules that protect the public and punish those who do harm to us.

Is that so hard?

Break a law, go to jail. Break it twice, hang ’em high.

Maybe there would be fewer banks and bankers. For sure, there would be fewer crooks in Congress.

A boy can dream, can’t he?


19 Responses to How to Regulate Prepaid Cards and the JOBS Act

  1. ray says:

    Wishful thinking. Politicians will not revisit regulations. They are aware of the tremendous number of duplicate programs, but in order to obtain re-election, they know the average citizens need to ‘see’ something concrete (even a bridge-to-nowhere) to substantiate all the ‘good’ that the politician has done for their community.

  2. Jerry Collins says:

    I had a MacDonald’s prepaid card. It was just handy because I did not have to fiddle with cash and change, just swipe it. It ran out of money; so I handed the clerk $50 to reload it. He fumbled with it and called the manager over. The manager did something and handed me back my card. The next day when I went to use it, there was no money on it. I had lost $50. No more prepaids for me thank you!

  3. BP says:

    “The problem with regulations in America isn’t that there are too many. It’s that they are too wordy (for the purposes of allowing loopholes).” Amen to that and the tax code “it should be simple and in black and white.” also.

  4. H. Craig Bradley says:


    The city attorney in bankrupt San Bernadino, CA recently told a group of residents that “they are on their own”, as most of the police force has been laid off. No money. Homicides are up 50% in the past 12 months. Residents have been advised to load their guns and lock the doors and to become more self-relient. Investors and depositors need to do likewise. Obama and other politicans could care less. You have been warned.

    • C. Frederiksen says:

      San Bernardino has problems, but not filling 72 police vacancies does not equal laying off “most of the police force” and the homicide number is statistical cherry-picking. City Attorney James F. Penman’s advise has not found support from the police department nor anyone else in city government.

  5. Michael says:

    Prepaid Card’s are just another scam that seems attractive to the user, and the seller, but allow the endorsing Banks behind the scenes to charge exorbitant fee’s to Merchant’s & Consumers when the cash in the card is used. No free lunch!
    I travel Internationally for my Business and do quite a few annual Bank Transfers in US Dollars. My NZ Bank handles a Card endorsed by the Bank of Scotland that allows me to draw cash (US Dollars) at “supposedly” any ATM without fee’s when I’m in the USA. Though they claim “no-Fee’s”, I’ve been hooked $5.00 for every ATM transaction PLUS I was caught in the wicked web of International Currency exchange fee’s even though the Card was loaded in US Dollars. I ended up with 20% fee’s overall for using the convenience of this supposedly “Free” card. I also lost $25.00 per deposit transaction to the black hole somewhere in between NZ and the US. Every time I sent money to my US account at Wells Fargo they charged me $10.00, Bank of New Zealand charges me $15.00. These fee’s appear on my account statements, but when I made the transfer from one account to the other the amount that actually appeared on the other end was $25.00US short – with no paper trail to show where it went! The story I got from both Wells Fargo and Bank of New Zealand was – Duh??? Banks charge fees for these transactions… I know that damnit, I can see YOUR fee on my Statement, it’s the $25.00 invisible transaction somewhere in between that I’m concerned about!!!! Nobody on either side of the Pond could give me an explanation for where my $25.00US on top of the Bank fee’s went. It cost me over $600.00 last year alone, before I discovered that the Black-Hole was the US “International Clearing Bank” that washes my money before giving it to Wells Fargo without any transaction receipt or even a kiss!!! This is pure bullshit that somebody can grab $25.00 out of thin air and remain behind the Wizard of OZ curtain! I haven’t been able to find the “International Clearing Bank” to know who it is, but if I’m a typical example of this secret money grab these insidious bastards are creamin it without a paper-trail. What’s up with that Shah?? Got any ideas? Mike

  6. LITM says:

    Too bad the crooks have reached the highest echelons of the administration with the result the public(taxpayers) have to (lump) it. Your ideas need to be forcefully supported via social media.

  7. Kevin Donnelly says:

    Consumer protection is on it’s way
    We hear about it every day
    And Regulations are in force
    ensuring benefits, of course
    But still we find that words undo,
    in passages so firm,-it’s true
    that means and meanings go astray,
    when ‘careful’ crafters have their way.
    They obsfurcate the true intent
    and angrify our discontent

  8. howard Walter says:

    I recall the public poll that asked people what the greatest threat to their liberty was. The vast majority responded: The Federal Government. The next question was regarding who they expected to fix it. The response was the Federal Government. Here we go again with the same. deja vu taint gonna happen

  9. Charles says:

    Hey Shah:

    Maybe legislators should be required to write all legislation at the level of reading comprehension of the average U.S. high school graduate. Not only might that make our laws more understandable, but might also provide some incentive for upgrading our educational system. Not only that, but we might actually be able to elect some people to Congress who are not already wealthy lawyers. This is a bit of tongue-in-cheek but I don’t know how the situation could be much worse than it is. Keep up the good work! I look forward to your insights.

  10. Mario says:

    Oh, Shah baby boy, you surely can dream!…But please tell me when was last time you saw a hen guarding a pile of seeds instead of being on the top spreading it all over?…Or a dog with belly ready to blow-up living something in his dish,even if he’s not even half through?…And we are not talking here about what pigs do one month before their Earthly demise…No, we are talking about clean and nice animals, like dogs and chickens. But I think, we humans still share some strains of DNA with both of them…Eh, make them three! Actually pigs are one of the closest DNA match to humans, if you didn’t know…
    Probably that’s why we blame it on “animal spirits”…

  11. C. Frederiksen says:

    As long as Boehner is Speaker of the House and it only takes a third of the Senate to block any change, better and more transparent regulation won’t happen.

  12. dave says:

    we live in a country were twice the number of people are in prison compared to russia and china combined.leads me to believe we have too many cops. what ever the reason some thing is broken.

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