How Will NetSpend Respond to the New CFPB Prepaid Card Rule?

Adam Rust

On April 1st, new rules governing prepaid debit cards went into effect. The regulations extend protections to consumers related to their rights to resolve errors, contest fraudulent charges, and to receive information about the accounts.

However, the new standards for overdraft services on prepaid debit cards overshadow the rest of what went into the new rule. The rule upended how the second-largest manager of prepaid debit cards operated.

The March 28th news that NetSpend turned off overdraft services on its prepaid debit cards underscores the rule's impact.  

NetSpend could have continued to offer a redesigned version of overdraft, but the company chose not to, even though the Consumer Financial Protection Bureau (the "CFPB") did not outlaw overdraft on prepaid debit cards but merely put in place requirements that make prepaid debit card companies responsible for proving that they have extended the service to consumers only they have vetted the applicant’s qualifications for credit.

But first - can you still go over by accident with your NetSpend card?

The Purchase Cushion Remains

NetSpend cards will still have a ten dollar purchase cushion, with the proviso that only accounts which have received direct deposit (s) of pay or government benefit (s) of at least $500 in the prior month can qualify. This is a win for consumers - they get the benefits of a cushion with the spike of an overdraft fee.

NetSpend reserves the right to use its discretion before offering the purchase cushion to anyone, so some may still not qualify even if they do have a qualifying deposit in the last thirty days. If you intend to use the proceeds from a benefits payment from the State of California to fund your account, NetSpend will not offer a purchase cushion.

Note: The new Varo Money No Fee Overdraft is better than the old NetSpend All Access Overdraft:

Coverage up to $50

No fees or interest

How did NetSpend’s Purchase Cushion Work?

If a PIN or signature-based transaction creates an overage of between $0.01 and $10, then the company will honor the purchase. The purchase cushion does not cover an overage associated with an ATM withdrawal or an electronic bill pay request.

What happens if the account holder leaves the funds in arrears?

NetSpend will pursue the debt.

Under NetSpends's terms and conditions, the account holder agrees to make good on the obligation within thirty days. Once that time has passed, NetSpend will issue a demand for those funds.

Cardholders consent to giving NetSpend the right to collect the overage the next time a credit hits the account.

NetSpend could freeze the account for new purchases, with the intent to allow the account to be debited again once the account holder has satisfied the debt.  

After sixty days, if the consumer has not paid back the negative balance, NetSpend will close the account. Doing so will not relieve the cardholder of the obligation to pay back the debt.

If the account holder does not resolve the problem, NetSpend will pursue other options. The company may try to collect from a different NetSpend account held in the name of the customer. As well, it could take legal action to recoup the outstanding debt.  

Doing all of this, just to collect six or seven dollars, seems like an inefficient use of NetSpend’s time. Companies pay a lot to marketing agencies to acquire a customer who funds an account with a direct deposit. The amount can easily exceed fifty dollars. Here we have a situation where a company closes an account after sixty days because of a dispute over less than ten dollars. It is a hard call.

Link to the Varo Money No Fee Overdraft
Picture of card

Varo Money, Simple, Chime and Empower all offer standard bank accounts without a monthly fee.

Simple, Chime, and Empower all have checkless checking models. However, those accounts do not offer overdraft, and as such, they do not have to vet applicants for their presence in a bad check registry.

Beginning in August 2019, Varo Money does have an alternative. Its Varo Money No Fee Overdraft product will let certain cardholders spend up to $50 beyond their balance.

Back in 2012, almost one of every two active NetSpend accounts had a recurring direct deposit.

For those who can’t meet the criteria for the DDA, NetSpend could still give them a prepaid debit card account.

I think it is only a matter of time before we see NetSpend making the shift to separate DDA and prepaid accounts. The DNA of the company says it will not let those millions slip away. I think it is only a matter of time before they start to migrate their best customers - i.e. those who put a direct deposit on to their account - to a demand deposit account. By doing so, NetSpend will free itself of the restrictions that the CFPB has placed on "hybrid prepaid-credit" cards. However, doing so will make it incumbent on the company to go to greater lengths to validate the risk profile of its applicants.

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