Most segments of the prepaid card industry apparently escaped the regulatory effects of the so-called Durbin Amendment to The Restoring American Financial Stability Act of 2010. Only open-loop, network-branded, nonreloadable gift cards, as well as similarly open-loop, nonreloadable rebate and loyalty cards, will be subject to the amendment, which is primarily designed to regulate the amount of debit card interchange the card brands can charge merchants.
According to Terry Maher, General Counsel for the Network Branded Prepaid Card Association, the amendment excludes all reloadable prepaid card programs that do not impose overdraft fees and that allow cardholders at least one free ATM transaction per month (on an ATM that is part of the card issuer's network).
Examples of exempted prepaid cards are those used to facilitate government benefits payments and cards typically used by low- to moderate-income (LMI) consumers as alternative financial tools, such as general purpose reloadable (network-branded) cards and payroll cards, Maher said. Maher believes the legislators chose to "carve out" reloadable prepaid cards from inclusion in the amendment because of the consequences of interchange regulation on LMI cardholders, of which many are considered unbanked and without access to traditional bank accounts. Maher said government agencies would also feel a substantial negative impact from regulation of government benefits cards.
The argument goes that if interchange rates are capped on certain prepaid cards and card issuers lose revenue because of it, they would have to find other ways to make up for that shortfall. One way would be to raise fees charged LMI cardholders who, by definition, are least likely to be able to afford increases in fees, such as activation and monthly maintenance fees.
"The cardholder fees ... were the big concern of a number of the progressive members of Congress, such as Maxine Waters [Rep., D-Calif.] and Luis Gutierrez [Rep., D-Ill.]," Maher said. "They were very concerned that the Durbin Amendment would have a serious impact on the low- to moderate-income consumers who rely on prepaid cards."
It seems the legislators also recognized the negative consequences that regulating interchange would have on government benefits programs. Mercator Advisory Group's special report, The Durbin Amendment: Impact Analysis, said over $24 billion in government benefits was disbursed on prepaid cards in 2009.
If interchange on benefits cards were regulated - meaning reduced - benefits card issuers such as Citibank N.A. and Comerica Bank would not impose new fees on cardholders, Maher said. Instead, issuers would turn to government agencies themselves to make up for that revenue shortfall.
Mercator estimated that government agencies would be on the hook for approximately $146.5 million in lost interchange revenue annually, which would have a "serious impact on state and federal budgets already constrained by lower tax income and higher operating costs." The Boston-based consultancy concluded that if the Durbin Amendment included regulation of government benefits cards, that agencies would have three options to make up for the shortfall: ask Congress for additional funding for the programs; add or increase cardholder fees; or return to printing and mailing paper checks.
Thom Aldredge, President of Plano, Texas-based World Gift Card, said the effect of the Durbin Amendment (named after Sen. Dick Durbin, D-Ill.) on the prepaid card industry will be "less than significant."
While the market is growing for the open-loop reloadable gift cards targeted in the amendment, "it still is relatively small compared to the closed-loop cards," Aldredge said. "So, in terms of the loss of the fees and the interchange to the issuers and the acquirers and Visa and MasterCard, it's just not going to amount to very much."
The amendment will have little impact on World Gift Card, according to Aldredge. The company is primarily a provider of closed-loop, retailer-specific gift card programs. Because closed-loop gift card transactions are not processed over the networks of the card brands, they are not subject to interchange and therefore are not covered under the Durbin Amendment, he said.
Furthermore, although open-loop, network branded gift cards are included in World Gift Card's product line, Aldredge hasn't seen a large demand for them.
Maher offered two possible outcomes from the Durbin Amendment if and when the financial reform bill passes through Congress and is signed into law by President Obama. Nonreloadable gift card providers might move their programs to issuing banks with assets under $10 billion, since those card issuers are exempt from the interchange provisions of the amendment, Maher said.
He also sees the possibility that program managers running nonreloadable prepaid card programs will simply make the programs reloadable to gain exemption from the amendment.
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