By Brian Tate
April 3, 2019 at 5:00 am ET
You may not have known it, but April 1 was a pivotal day for the payments community. The Consumer Financial Protection Bureau’s final rule for prepaid accounts officially extended existing consumer protections to mobile wallets and P2P products. It also placed requirements on traditional prepaid products, which have for years been regulated by banking agencies.
It is important to keep in mind that the prepaid community was providing consumer protections disclosures, as well as Federal Deposit Insurance Corp. insurance, years before the CFPB’s rules were finalized, but this deadline formalized revamped thinking from regulators on what constitutes a prepaid account.
The industry is ready for this evolution.
In 2010, the CFPB was created and granted broad authority to regulate spheres within the financial services sector. In 2012, the bureau set its sights on regulating prepaid payments by releasing a modest, 25-page proposal. Since that offering, the prepaid community has been working with the CFPB in good faith to ensure what transformed into a 2,000-page final rule for prepaid accounts protects and informs consumers while permitting the industry to continue innovating to meet customer needs.
Since prepaid products are so ubiquitous, many consumers and policymakers may not have noticed that these products have been leading innovation in the payments industry for years. In fact, almost every payment innovation in the last 10 years has borrowed from or been built on top of a prepaid platform. That’s why the bureau applied its prepaid regulations to payment access devices beyond the traditional prepaid account.
The CFPB’s definition of a prepaid account means the agency is not simply regulating prepaid; the new rules are creating a starting point to regulating all payments. This should make every fintech stop and think: Do these rules extend to my product?
We live in a world driven by prepaid technology, whether you realize it or not. The next time you use an app to pay for dinner or drinks with your friends, you can thank prepaid innovators. You get the convenience of splitting your bill without compromising the store’s ability to receive payment in a safe and efficient manner.
Which is exactly why, with these regulations going into effect, you will begin to see major players entering the prepaid space. Household names such as Starbucks, Kroger, Amazon and Apple are now embracing prepaid-based solutions as a valuable form of payment.
The lines between prepaid accounts, traditional banking and fintech are so blurred that many industry experts are unable to identify where prepaid ends and traditional banking and fintech begins. However, there is one area where prepaid and traditional banking products differ — credit.
The new CFPB regulations make it extremely difficult for users of innovative payment products to access credit, limiting their promise in the process. If prepaid account holders cannot easily access credit, some users may become so frustrated that they move away from prepaid products altogether.
If left in their current form, the CFPB’s restrictions could have the unintended consequence of limiting the potential growth of payments innovation at a time when new ideas and progress are needed to reduce the number of unbanked and underbanked households. Tapping prepaid’s creativity has been cited by the Boston Federal Reserve as one possible solution to helping the more than 40 percent of Americans who are unable to access $400 in an emergency.
While we acknowledge the admirable goal of protecting consumers from potentially harmful products, we believe this goal can be addressed without the restrictive guidelines that picks winners and losers in the credit marketplace.
Ultimately, the key to resolving this issue is education.
Things are moving so quickly in the innovative payments community that the industry’s potential to create cutting-edge products that help individuals will always be inextricably linked to policymakers’ ability to embrace the change that is happening around them in real time. What is clear in 2019 that may not have been clear in 2012 is that the CFPB’s rules were initially aimed at a product they viewed with limited potential. Now, thanks to the ingenuity of the innovative payments community, innovative prepaid products are recognized as a critical component of the future of banking.
Brian Tate is CEO of the Innovative Payments Association.
Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.