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

Adam Rust

On April 1st, new rules governing prepaid debit cards go 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 is in the new rule. The rule will upend how the second-largest manager of prepaid debit cards operates its business. The March 28th news that NetSpend turned off overdraft services on its prepaid debit cards underscores the rule's impact.  

They could have continued to offer a redesigned version of overdraft, but it chose not to. The Consumer Financial Protection Bureau 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.

I believe that we haven't heard the last from NetSpend and its interest in overdraft fee revenues. 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.

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.

How does 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.

Picture of card

What is next up for NetSpend?

Will NetSpend walk away from overdraft fees?

I see a likely scenario where NetSpend continues to offer its traditional prepaid debit card, albeit one without an option to opt-in for overdraft, and then expands to also have a demand deposit account (“DDA”).

NetSpend’s parent company recently estimated that its prepaid card accounts generated $80 million in overdraft fees in the prior year.

NetSpend would add the DDA account to overcome the treatment of overdraft on prepaid debit cards.

In the new business model, better customers would be offered the DDA service based on NetSpend’s evaluation of their risk profile. The first criterion for qualifying would probably be the presence of a recurring direct deposit. That was a condition of being able to opt-in for an overdraft. Second, NetSpend would want to vet their banking history. They might reject applicants, even though with a direct deposit if they appeared on ChexSystems.

Varo, 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.

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.

The new system would require NetSpend to change its pricing structure. Until now, NetSpend has utilized a three-pronged pricing structure. Customers who had a recurring direct deposit of at least $500 paid a fee of five dollars per month. Other customers could select from one of two pricing models: the pay-as-you-go system that had no monthly fee but charged money each time the consumer used the card, or an alternative with a monthly maintenance fee of $8.95 but no transactional surcharges.

In spite of those high monthly fees, NetSpend never offered a fee-free ATM network.

How would NetSpend price the new DDA? Given that it would serve its direct deposit customers, NetSpend will view those accounts in a manner akin to how it treats its current direct depositors. That would suggest a price of $5 per month. However, that would be uncompetitive. Varo, Simple, Chime and Empower all offer DDAs without a monthly fee.

What is a demand deposit account?

Officially, a demand deposit account is one that allows the holder to deposit or withdraws funds at any time. That is different than with a prepaid debit card. With a prepaid debit card, the program manager and issuing bank can prevent an account from going into the red. With a demand deposit account, that is not possible. The account is either “on” or “off,” and if it is in the “on” position, then the funds can be accessed.

By definition, a demand deposit account is also categorically different from a savings account or a certificate of deposit. If a demand deposit account pays interest, the amount will probably be de minimis. In exchange for your promise to leave your money inside the bank for a specified period, the bank pays you a higher rate of interest. With that in mind, the bank can loan out your deposits with greater certainty. Regulators watch these factors closely, gauging the length of deposits and using that as a determinant for how much money the bank can extend in credit.

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.

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