Through a regulatory technicality, NetSpend found a way to work around the CFPB’s restrictions on overdraft fees on prepaid debit cards. Now, NetSpend is mailing flyers announcing a new incentive that will probably drive more people back to overdraft fees. The new NetSpend promotion promises to reward people with a $100 credit if they establish direct deposit to an Ace Flare account, and therein, they are incenting people to take the steps necessary to turn on overdraft on their accounts.
Until April 1st, 2019, NetSpend offered an optional overdraft service on its prepaid accounts. The company removed that functionality on all existing accounts then, driven by new rules from the Consumer Financial Protection Bureau governing all prepaid debit card accounts. Notably, while the CFPB’s new rule did not prohibit overdraft, it did establish a set of procedural requirements that added costs and delayed signup. NetSpend, in its filings to investors, attributed its decision to drop the service because of the new regulation.
At the time, I predicted that NetSpend would find a way around the rules. NetSpend is now claiming that its Flare account is a quote unquote "bank account."
But, the rule exempts a checking account, and the Flare Account is not a checking account.
Only a few consumers will appreciate the difference between a Flare account and a prepaid debit card.
With this regulatory experiment, NetSpend has pushed against – you might even say evaded – the CFPB’s intentions. NetSpend is marketing Flare through Ace Cash Express stores – the exact market that has traditionally utilized their prepaid debit card product – with a difference that is not a distinction to its cardholders.
It remains to be seen if this evasion will survive.
NetSpend probably hungered for a way to restore overdraft revenues to its accounts. In a recent filing from its parent company (TSYS), the company said second-quarter service fee revenues fell by $2.4 million year-over-year. To explain that change to investors, the company offered this analysis:
Service fee revenue decreased $7.8 million and $2.4 million, or 5.5%, and 0.8% for the three months and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The decrease in service fee revenue for the three and six months ended June 30, 2019, was driven by the removal of certain service fees on prepaid products effective April 1, 2019, upon the effective date of the Consumer Financial Protection Bureau’s (“CFPB”) 2016 prepaid rule.
MetaBank, once the issuer of the i-Advance line of credit, issues the Flare account.
By my take, this infers that NetSpend had been receiving almost $10 million per year in service fee revenues from its overdraft program.