How long will Prepaid Cards be Spared from Regulation?

Prepaid debit cards are the fastest growing of all electronic payments, according to a new report by the Federal Reserve System. U.S. consumers loaded $28.6 billion on reloadable prepaid debit cards in 2009. Prepaid debit cards offer an alternative to credit cards for the millions of unbanked and underbanked Americans.

Banks, expecting to lose billions in fee revenue from debit card overdrafts and interchange fees due to new regulations, are making a big push into prepaid cards. And as the costs of keeping low-balance checking accounts rise, prepaid debit cards will provide a more affordable option for increasingly more consumers.

The rapid growth in prepaid cards means there are companies that see opportunity in prepaid cards and are willing to push boundaries in this loosely regulated financial services business. Naturally, the more aggressive companies become, the more likely the industry will trigger the attention of consumer advocates and regulators. A notable recent example is a prepaid debit card launched by the Kardashian sisters targeting teenage viewers.

Although the Kardashian card was pulled off the market after receiving criticism for its excessive fees, it is the type of news that fuels consumer advocacy organizations. Already there are consumer advocates charging that prepaid cards come with high fees including purchase fee, usage fees, reloading fees, cash withdrawal fees and claiming protection is needed for consumers.

While prepaid cards have been exempted from financial reform measures for now, particularly the Durbin Amendment which regulates debit card interchange fees, regulation is a major risk factor for the sector in general, particularly given the Obama Administration's mission to curtail real and perceived consumer abuses in financial services.