NetSpend says it will prevent existing account holders from opting-in to its overdraft protection service on March 20th and will then terminate the program entirely on March 28th.
NetSpend is one of the largest prepaid debit card program managers in the United States and the only mainstream card with overdraft.
The change is without a doubt a product of the Consumer Financial Protection Bureau’s (the “CFPB”) upcoming rule on prepaid debit cards. The rule is scheduled to go into effect on April 1st.
NetSpend emphasized the low-cost, consumer-friendly nature of its overdraft service. The company charges $15.00 when a customer makes a transaction that leaves the balance in the red by more than ten dollars. It differentiated on price and also on patience. Fifteen dollars is far less than what most big banks currently charge. Moreover, NetSpend gave consumers a grace period to right their accounts.
To be accepted for overdraft, an account had to have had a direct deposit of at least $400 in the month prior to when the consumer asked for the service. To continue to qualify, the account had to receive new deposits of at least $200 per month. If an account was charged an overdraft fee and the consumer did not cover the fee within thirty days, the company would deactivate overdraft protection.
The service would cover overages on signature and PIN swipes, on ACH debits, and on ATM withdrawals.
While their fees fell far below the rates charged by most banks, NetSpend consumers who opted-in for the service were prone to making frequent overdrafts.
American Banker (firewalled) says that the rule will “take an $80 million dollar bite out of NetSpend’s revenue.”
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Total Systems Services, the corporate parent of NetSpend, attributes the change to the implementation of the Consumer Financial Protection Bureau’s new final rule on prepaid debit cards. The rule is scheduled to go into effect on April 1st – approximately 24 hours after NetSpend says it will terminate its overdraft plan.
In its most recent 10-k, TSYS states:
“The CFPB has promulgated a new rule regarding prepaid financial products, which, among other things, will establish new disclosure requirements specific to prepaid accounts, eliminate certain fees that may currently be imposed on prepaid accounts, and make it economically unfeasible for a prepaid card provider such as our NetSpend business to offer courtesy overdraft protection on prepaid accounts. The rule is scheduled to become effective April 1, 2019.”
Of note, the CFPB’s new rule does not explicitly prohibit overdraft nor does it place a restriction on the price that program managers and their partner issuing banks can charge. It does require companies to utilize certain procedures for marketing the product. Companies cannot contact consumers until an account has been active for at least 30 days. If a consumer does make an overdraft, then the company has to wait at least 21 days before the can charge a fee. Additionally, the rule forces companies to treat overdraft as a credit service. That means that companies have to comply with the Truth-in-Lending Act if they are going to offer overdraft.
Not everyone in the prepaid debit card industry finds fault with the new rules. In fact, the trade association for prepaid debit cards has spoken favorably of the CFPB’s actions.
The industry did push back on a detail in the original rule that would have extended consumer rights in cases of disputed charges. The issue focused on disputes on accounts that had been opened, received a deposit, but had not yet been activated. The industry contended that such a protection would have exposed companies to fraudulent claims. The rule was altered to reflect those concerns.
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