Will the Durbin Amendment Create A Permanent Economic Underclass?
August 5, 2011
Ben Jackson
Mercator Advisory Group
In the discussions about prepaid exemptions in the Durbin Amendment to the Dodd Frank Act, much of the attention around the provisions has focused on the interchange caps and routing restrictions. Little attention has been devoted to some of the other consequences of the amendment, however. One unintended consequence is that the Durbin Amendment may lead to the creation of a permanent economic underclass.
It is no mystery that many prepaid cards are designed to help unbanked and underbanked cardholders gain access to the financial mainstream. Many of these individuals have impaired credit or checkered histories with banks, and so cannot qualify for a standard account. As a way of helping these customers rebuild their financial lives, many card programs offer bill payment, person-to-person transfer, and savings account features.
With its limitations on the accounts and services that prepaid cards can access and still qualify for exemptions, the Federal Reserve has made recovering from previous financial trouble much more difficult. If a cardholder’s card is issued by a bank with less than $10 billion in assets, this is less of a concern, however many payroll programs are issued by large banks. These cardholders may find that they can no longer pay bills, pay or collect money for informal work, or start savings accounts for themselves.
Having an individual savings account attached to a card would turn it into a debit card. Program managers may decide to drop this feature rather than risking the loss of exemption from interchange caps. Losing this ability to save funds means these customers will only be able to stash cash under a mattress and not be able to use that account for credit decisions. They will not have funds for emergencies, leading them to seek out expensive credit when they need car repairs for example.
Many prepaid card holders could be forced by the provisions of the final rules away from the financial mainstream and into a position where the only products available to them are transactional products that provide convenience but lack financial mobility. Without the possibility of building assets and with large portions of their budgets going to paying for financial services, these cardholders may end up forming a permanent economic underclass that exists purely and permanently as a source of fee revenue for financial service providers.