430,000 consumers who could not access funds deposited to their NetSpend prepaid debit cards will receive refund checks as part of NetSpend’s settlement with the Federal Trade Commission.
The FTC said that NetSpend accepted deposits to accounts that had not yet been opened. Harmed consumers were unable to access funds because NetSpend either delayed their activation or blocked the account from being used.
In its complaint, the FTC writes:
NetSpend tells consumers that NetSpend cards are ready to use immediately and will provide them with immediate access to their funds. In other ads, NetSpend tells consumers that approval is guaranteed.
Further, NetSpend tells consumers that disputed transactions will be eligible for a provisional credit until resolved. Despite these claims, many consumers have been unable to use their cards immediately or access funds on their cards, including for prolonged periods of time—sometimes as much as weeks, or at all, meaning they never regain access to their own money. Despite NetSpend’s claim of “guaranteed approval,” NetSpend’s approval is contingent upon consumers meeting unexpected requirements; ultimately, many consumers have not been approved, and have lost funds they have already placed on the cards.
… NetSpend has denied many consumers access to their money, sometimes for weeks. Many consumers have not been able to use their NetSpend cards immediately and have been subjected to delays in accessing their funds when attempting to activate their cards, lift account blocks imposed by NetSpend, or access their payroll, government benefit, or other direct deposits.
The FTC wrote that NetSpend would accept deposits, hold the funds, and apply fees to accounts that were not also active and functional.
During the period in question, NetSpend charged account usage fees of $5 to $5.95 per month.
In more than 100,000 instances, NetSpend delayed access to funds that were deposited by direct deposit for more than one day, even though consumers should have access to those funds after they settle.
As well, the FTC said that NetSpend did not comply with requirements to provide provisional credit (restoring funds) to accounts when consumers had asked the company to investigate a potentially fraudulent charge to their account. By the Electronic Funds Transfer Act, card companies are supposed to put funds back on a card if they cannot complete their investigation within ten business days. If it happens that later on, the company discovers that the charge was legitimate, then the funds can be retroactively removed from the account. There is an exception for newly opened accounts.
In all, the class will receive more than $10 million in refunds. The size of the refund will depend on the amount of fees charged to the affected accounts.
NetSpend will disburse the refunds by check.
The FTC detailed examples of advertisements where NetSpend stated that card accounts would be ready to use immediately, that consumers would have immediate access to their funds, and that all consumers would be approved.
An ad for the NetSpend Skylight One payroll card:
• “Your money is secure and always available.”
For its regular general purpose reloadable prepaid card:
• “Guaranteed approval.”
• “No waiting”/”Sin esperas!”
• “Immediate access to your funds.”
The FTC said that consumers, having taken these statements at face value, then experienced financial hardship. Some of their difficulties stemmed from NetSpend’s practice of making cardholders wait for twenty days to receive a refund for funds held on a closed account.
Here is a link to the unsealed complaint, initially filed by the FTC on April 11th, 2017.
The problem is not that NetSpend asked people to activate their cards before they spent their funds. Card companies should delay giving access to funds until the account has been activated. All debit cards – be they for a prepaid, payroll, or checking account – must be activated before they a person can use them. This rule protects consumers from theft. By requiring a consumer to activate a card, the issuing bank can verify that the card is in the hands of the correct person. Absent such a system, criminals would probably steal mail in search of envelopes with active ready-to-use cards.
The FTC punished NetSpend because so many consumers reported that they couldn’t access their funds for a long time – even if they tried to activate their card. Consumers called to ask for access to the funds, but NetSpend failed to resolve the blocks. According to the complaint, hundreds of thousands of accounts were blocked for more than a day from 2010 to 2014. In over 100,000 cases, the blocks lasted for longer than one month.
I wonder how other companies will interpret the FTC’s action. On the one hand, what NetSpend did when it blocked accounts materially impacted the financial lives of many Americans. The difficulty that consumers experienced in resolving their problems, along with the delay in how NetSpend investigated the resolution of errors, represent outliers to common business practices. However, the FTC also slapped NetSpend for deceptive advertising. The claims made by NetSpend are not unusual. Many cards promise to give consumers immediate access to funds delivered by direct deposit. NetSpend even added legal disclaimers to their ad text. None of that appears to have made a difference. In the end, I see two completely different sets of activities that have been lumped into one complaint, with the result that it is hard to know what degree either contributed to the overall penalty.
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