An article in USA Today posits that the new CFPB rules will bring overdraft to prepaid cards, reflecting a broad misunderstanding of both prepaid card users and the new rules that govern them. If anything, the opposite will happen, and prepaid card users will lose all access to overdraft programs.
More consumers who use prepaid debit cards will be able to spend more than their balance, starting in October 2017. But if that feature sounds very much like overdraft protection on a traditional checking account, well, there are some key differences.
Before the new rules came into effect, there were two companies that offered overdraft on prepaid cards. Overdraft was not a widespread offering in the prepaid world because many of the customers using prepaid cards already had had problems with overdrafts and the associated fees and were looking for an alternative. It is worth noting that since many of these individuals are at the low end of the socioeconomic scale, they have impaired credit.
This means that they will not be able to qualify for credit under traditional underwriting standards. It is worth noting that in its latest quarterly filing, TSYS, which owns Netspend, one of the two prepaid card companies that offered overdraft, said the following:
In October 2016, the Consumer Financial Protection Bureau (CFPB) adopted its final rule pertaining to prepaid financial products. Among other things, the new rule establishes new disclosure requirements specific to prepaid accounts, eliminates certain fees that may currently be imposed on prepaid accounts, and effectively eliminates the ability of a prepaid card provider such as NetSpend to offer a courtesy overdraft program. The new rule will become effective October 1, 2017.
So, the new rules will not bring overdraft to prepaid card customers. It will eliminate that option from the few who might need it
Overview by Ben Jackson, Director, Prepaid Advisory Service at Mercator Advisory Group