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.

On March 28th. as if to underscore the impact of the new rule, NetSpend turned off overdraft services on its prepaid debit cards.

Note - as of this writing (November 2019), NetSpend has pivoted and is back to offering overdraft, albeit not on its prepaid debit cards. NetSpend has expanded its product line to include a demand deposit account. By doing so, NetSpend can market to its traditional customer base, but avoid the rules governing prepaid debit cards. Some would say this represents an effort to evade the CFPB's rule.

NetSpend could have continued to offer a redesigned version of overdraft available to those who could meet an underwriting standard, 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, as it is offers far more flexiblity without any fees:

1) Coverage for overages of as much as $50

2) 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.

Two Bank Accounts without Overdraft Fees
Picture of card
Picture of card
purchase cushion on netspend cards

Varo Money, Simple, Chime and Axos all offer standard bank accounts without overdraft fees.

Simple, Chime, and Axos have checkless checking models.

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, providing that they meet certain conditions. The account will have to recieve a direct deposit of more than $500 in the previous month, and it will have to have made a minimum number of debit card purchases.

Back in 2012, almost one of every two active NetSpend accounts had a recurring direct deposit. A caveat to that statement is that the number is somewhat of an apples-to-oranges comparison. NetSpend includes its Skylight payroll cards in the calculation, and by the nature of Skylight's status as a payroll card, 100 percent of those accounts receive pay by direct deposit. Therefore, the share of non-payroll cards with a direct deposit is far lower.

Earlier this year, I hypothesized that it would only be a matter of time before NetSpend shifted to a new model, one that would involve a second line of products beyond just GPR prepadid. Indeed, that has occurred, and apparently for the reason I suspected. NetSpend has come out with the Flare account, marketed through its relationship with Ace check cashing stores. The Flare account has an overdraft feature, available only to those account holders who establish a direct deposit, with a high fee. By doing so, NetSpend will have evaded the restrictions that the CFPB has placed on "hybrid prepaid-credit" cards.

Additional reporting on NetSpend:

NetSpend to Cease Overdraft Services on its prepaid debit cards (March 2019)

FTC Settles with NetSpend over Blocked Accounts

CFPB Prepaid Rule Goes into Effect - No More Overdrafts for NetSpend (March 2019)

How Will NetSpend Respond to the New CFPB Prepaid Rule? November 2019

Comparison of Fees for NetSpend, Green Dot, and Varo Accounts

NetSpend's Ace Flare Account Has Overdraft Fees - Is this an Evasion? (September 2019)

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Adam Rust has worked to defend consumers against harmful financial practices since 2005. He has written extensively about overdraft fees, payday lending, credit insurance, student loans, prepaid debit cards, high-cost installment loans, and subprime mortgage lending. The New York Times interviewed him when it reported on the CFPB's rulemaking on prepaid debit cards; subsequently, his research paper framed the debate on consumer protections.

He serves on the Board of the US Faster Payments Council. He is Director of Research at Reinvestment Partners in Durham, North Carolina. He is the author of BankTalk. He is the author of "This is My Home: Challenges and Opportunities of Manufactured Housing" and has testified to Congress on how to redress some of the problems with manufactured housing. See more on his LinkedIn profile.