Five years after the passage of the Credit CARD Act, consumer advocates are not content to bask in the victory and instead are gearing up for battle royale number two – abusive fees on debit and prepaid cards.
It’s not enough that according to a Consumer Financial Protection Bureau report, consumers are saving an estimated $12.6 billion a year in lower fees and interest charges, with credit card reforms, there’s more work to be done.
"Now it’s time to tackle the missing protections, like limits on fees and credit features on the other payment cards like debit and prepaid," said Linda Sherry, national director of priorities at Consumer Action in a prepared statement.
One of the big rights missing with debit cards, says Edgar Dworsky, founder of ConsumerWorld.org, "is the ability to chargeback a purchase that goes wrong, such as the product is not delivered, the product is defective, or is not as advertised."
You also don’t get the solid protection a credit card offers when your debit card is lost or stolen. "If you fail to report it in a timely way, your liability increases from 0 to $50 to $500 to unlimited as times goes by," he says.
Overdraft fees on debit card transactions are onerous. The typical overdraft fee exceeds the size of the overdraft itself. At $35 per overdraft, these fees quickly pile up, especially if multiple fees are applied in a matter of days. According to the Center for Responsible Lending, overdraft fees on ATM and debit card transactions hit consumers hard, nearly $6 billion a year.
"Overdraft fees should be completely banned on debit and prepaid card transactions," said Lauren Saunders, associate director at the National Consumer Law Center in a prepared statement. "Debit card transactions can be denied without a fee if the account is empty, and then the consumer can decide whether to pay on credit or skip the purchase. Keeping overdraft fees off of prepaid cards is especially important to keep those cards for people who have been shut out of bank accounts."
As for prepaid cards, it’s practically the wild, wild, west. There are no federal laws or regulations protecting people from hidden fees, expensive credit features, and other hazards. There are also no requirements to clearly disclose all the costs and fees of prepaid cards. This has not gone unnoticed by financial watchdog, the Consumer Financial Protection Bureau which is considering rules on prepaid and debit cards.
Not everyone however is ready to push for reforms on prepaid and debit cards. "The industry does not need fixing, rather it suffers from too much regulation which hurts the consumer today," says Jim Angleton, president of Aegis FinServe Corp., a wholesale card issuer. "Dodd Frank has limited the amount of money that can be loaded onto debit/prepaid cards. Isn’t it safer to load funds safely in a card than carry a wad of cash on you?" he asks.
Angleton also complains that the Know Your Customer rule is too complex. "More often than not, a similar name tied to a terrorist or nefarious actor can spill over to an innocent person."
While he says costs have become lower and inline with services, "overregulation is not deterring terrorism, money laundering or drug dealing, it is really hurting less fortunate people and that can promote bad behavior in relationship to banking."
But with billions in fees at stake, consumer advocates are ready to rumble.