How is prepaid different now that another regulator has flagged a bank for failing to put the right protections in place for their cards?
I think that most people who have read the agreement will conclude that there are two immediate possibilities - neither of which is exclusive of the other. Some will read it to mean that the days of
overdraft on prepaid are numbered. Others will see that most of the agreement focused on compliance.
I question the likelihood that overdraft is done. Urban Trust has fewer than 100,000 accounts. If regulators really want to go after overdraft, then the only enforcement action that would matter would be one against NetSpend-managed cards. NetSpend has more accounts than any provider save for Green Dot.
No argument can counter the second observation. Prepaid is now about compliance. That creates winners out of the big players, because yesterday's action portends of a future where competition in the prepaid space is heavily factored by the ability to offset the costs of compliance through scale.
An institutional investor whose fund focuses on the alternative financial services space told me that today's winners are MetaBank and Bancorp Bank.
"I think that it impacts everyone in the prepaid business, but it will disproportionately impact the smaller players/issuers since the fixed costs have to be spread over a smaller base....The small banks still have to track customers. I imagine that when regulators come in for the exams, they want to see (i) the processes in place, (ii) specific examples of accounts and transactions that were flagged in the normal course of business, and (iii) how the bank handled those exceptions. That is where they encounter the additional costs and regulatory vulnerability."
Both Metabank and Bancorp are big enough to have scale in prepaid, but not too big to run up against interchange caps. Most importantly, each has the resources to fold those compliance costs into their operations without impacting their margins too greatly.
The basic problem is that bad actors seeking to find low-profile ways to move their money are always going to be attracted to buying a throw-away bank account. Prepaid cards - just like a burner phone - offer lots of advantages for people with the wrong intentions. From an issuer standpoint, putting up a moat to keep those guys out is much harder when accounts are opened online or in a retail store. The issuers depend upon the efforts of employees of other companies in their efforts to comply with the Bank Secrecy Act and the Anti-Money Laundering Act.
This was part of the problem at Urban Trust. The OCC's agreement called out the bank for failing to monitor the practices of its vendors.
Given the challenges of the product, it is a bit surprising that these kinds of agreements do not occur more often. The fact that it is a rarity should be seen as a credit to the prepaid industry. I imagine that protecting the integrity of accounts is a constant battle for issuers and program managers.
The President of Green Dot Bank told me that his company puts limits on the number of cards that any one individual can have at once as well as during their lifetime. I spoke with a program manager last year whose management decided to cease offering any cards through their web site, because their small company was getting hundreds of suspicious applications every day. It was a case of taking the wheat from the chaff. Regrettably, it was a lot more chaff. Particularly "chaffy" were the scores of people filling out applications to deposit a tax refund owed to a person of a different name.
Today, I received a notice from the program manager of one of my prepaid cards that the terms of my account were changing. Those changes include:
- new restrictions on the use of ATMs outside of the United States.
- Limit on daily transfer from a credit card drops from $500 to $100.
- Maximum transfer from card to an outside bank drops to $500.
Similarities with MetaBank
Today, more than a few advocates are focusing on overdraft fees offered on accounts issued by Urban Trust through its relationship with Check$mart.There are more than a few similarities between the two issuers. Both offered a version of credit on their cards. MetaBank had the i-advance; in several states, Urban Trust's Check$mart cards had a overdraft convenience fee. The OCC says that Urban Trust had issues with managing the relationships with third-parties. MetaBank cards were used by international terrorists to kill one of the leaders of Hamas.
Nonetheless, while the Check$mart overdraft was an exception to the norm in prepaid, it was not unique. NetSpend continues to let its customers enable their accounts with overdraft.