In the last few years, store gift certificates have matured into a diverse set of financial products including “open loop” prepaid cards capable of providing services traditionally reserved to banks. At the same time, tighter regulations on banks have raised the cost of bank accounts and driven many out of the banking market. Prepaid card providers including merchants like Walgreens are seeking to serve this new “unbanked” population with bank-like services including overdraft protection.
Consumer groups have not given these new services a warm reception. In some cases, their concerns were warranted as prepaid programs made an end run around payday lending laws. However, recent actions have left companies in a quandary as to the precise limits of laws against deceptive and unfair practices.
This paper seeks to survey regulatory actions, guidance, and current law to suggest a set of best practices that will allow companies to provide the innovative products that consumers are demanding while ensuring that they remain financially sound.
I suggest practices like certain disclosures and following certain practices regarding how consumers opt in to the service, perhaps even a per transaction opt-in via cell phone; certain guidelines in determining eligibility for the service; structuring the costs to the consumer to include reasonable interest, a de minimus transaction threshold, grace period, and distinguishing between different types of transactions; fourth, the approach the program uses to address chronic overdraft users.
Full article is available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2394442
*Update, this article has recently been featured on several SSRN top 10 lists: IRPN: Innovation & Marketing (Topic) Top Ten, LSN: Enforcement of Consumer Laws (Topic) Top Ten and LSN: Other Enforcement of Consumer Laws (Sub-Topic) Top Ten.