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Power of Prepaid: Industry Rallies for Innovation amid Uncertainty

By Loraine DeBonis, Editor-in-Chief

As the prepaid industry converged on the U.S. capital last week, familiar themes of regulatory uncertainty as well as opportunities to expand the business took center stage. Although regulatory uncertainty is all-too familiar for prepaid executives, there also was a palpable sense of excitement about the potential to innovate.

“Prepaid is the platform of, ‘what if?’” said Jeremy Kuiper, executive vice president of payment solutions at The Bancorp and one of the conference co-chairs. “You are the people who have asked that question,” he told the audience during the conference kickoff. “The power of prepaid is the power of what if.”

Following on that theme, keynote speaker John Hope Bryant, author of How the Poor Can Save Capitalism, delivered a rousing speech challenging those in the audience to be in the industry “with both feet” and to be different.

Bryant discussed his work with Operation HOPE, a nonprofit he founded that has opened 86 HOPE Inside offices in bank branches over the past two years. Through financial education, the organization works to help consumers to substantially improve their credit scores after an 18-month counseling course. In 2015, prepaid issuer MetaBank pledged $1 million over four years to create a virtual HOPE Inside office for Meta cardholders.

“Nothing changes your life more than God or love like moving your credit score 120 points.”

—John Hope Bryant, Operation HOPE

“Nothing changes your life more than God or love like moving your credit score 120 points,” Bryant said. Citing new partnerships with the likes of SunTrust, which has committed to expanding its seven locations to 200 by 2020, Bryant said he aims to create the “Starbucks of financial inclusion.”

The accessibility, immediacy and security of prepaid came up in a session on The Next Big Thing. Panelists discussed the importance of prepaid providers tapping into omnichannel commerce trends, loyalty and new use cases for higher income consumers—think paying your nanny or your boat captain.

“The segments using prepaid are expanding, including the more affluent segments,” noted Peggy O’Leary, prepaid sales director, CPI Card Group. Among consumers with incomes above $150,000, for example, prepaid cards are being provided to personal staff to be used as expense cards, she said.

Getting your cards into mobile wallets is another key for growth. “One of the biggest advantages of digital provisioning is speed. You can actually get a ‘card’ now, spend now,” said Lisa McFarland, chief product officer at Ingo Money. “That doesn’t mean people don’t want the plastic. People are comfortable with plastic, but plastic can’t happen instantly.” The future is not one or the other, but one in which consumers can choose the form factor that best fits their needs in a specific situation.

Products that help companies replace checks, along with mobile features and the ability to better coordinate prepaid cards with other products in the portfolio—for example, combining commercial credit and prepaid expense cards for business managers that potentially have the need to use both—also present greenfield, Alex Liu, senior product manager for commercial and government prepaid cards, Bank of America Merrill Lynch, told Paybefore. “It’s still a good time to be in prepaid,” Liu said. “Sure, we’ve seen some consolidation, but the competitive landscape hasn’t gotten any smaller, which tells me that many providers are finding prepaid to be a good industry to invest in.”

More of the Same, or Real Change?

Rep. Barry Loudermilk (R-Ga.) used part of his keynote address to reveal how the shooting at the Republican Congressional baseball practice the previous week had affected him. “I will continue to oppose bad policy,” he said, “but I will not engage in character assassination. I won’t demonize an entire group of people because of their political beliefs.”

While Rep. Loudermilk called for a change in political attack rhetoric, he continued to spell out his message of reform for the CFPB. “There’s no better evidence of the how things should not work [in government] than the CFPB,” he said, pointing to the bureau’s lack of oversight not only from Congress, for appropriations, but also from the president, who currently can only remove the director for cause. He also described the judiciary as “handcuffed” to give the CFPB’s own interpretations of rules precedence.

Rep. Loudermilk, who serves on the House Financial Services Committee, also applauded Chairman Jeb Hensarling’s Financial CHOICE Act, which would change the bureau’s structure to that of an enforcement agency.

During a panel on the potential impact of the Trump administration on the payments industry, NBPCA President and CEO Brian Tate asked panelists to weigh in on the stalled efforts to use the Congressional Review Act to repeal the CFPB’s final rule on prepaid accounts. Resolutions in the House and Senate were not taken up for a vote before the May 11 deadline.

“Although it is a regulator, I think [the CFPB] showed some political savvy,” noted Craig Saperstein, of counsel in the D.C. office of Pillsbury Winthrop Shaw Pittman LLP. “It took some of the wind out of the [CRA] sails when they proposed the delay and said they were open to further substantive changes [to the prepaid rule].”

Divisions in the industry—some favoring repeal, while others favored changes along with an extension of the effective date—also contributed to Congressional inaction, panelists suggested. The idea that CRA would put the kibosh on any further rulemaking for prepaid also played a role in its ultimate failure.

With Republicans controlling the White House and both houses of Congress, experts suggest that Republicans would use CRA to block the long-anticipated CFPB rulemaking on arbitration, if it ever comes. As financial institutions are quick to point out, the CFPB’s own research shows the benefits of arbitration over litigation. But, “the optics are bad,” in terms of using CRA to repeal small-dollar lending rules, also expected to come out later this year, according to Isaac Boltansky, director of policy research, Compass Point Research & Trading LLC.

“In D.C., stories are stronger than spreadsheets,” Boltansky added. Communicating the tangible impact to lawmakers and regulators is better than a graph, he said.

The buzz around fintech also presents an opportunity for prepaid providers to talk about how their technology provides access to financial services or helps small businesses, panelists suggested. Access to credit brings together the left and the right, and is one of the few unifying things in Washington, they noted.

CPPB’s Legacy

As experts discussed the future of the CFPB, one thing is clear: Change is ahead. What’s less clear is when and whether it will come from Congress in the form of the Financial CHOICE Act—which may struggle to gain ground in the Senate—the ultimate decision in the PHH case, or Cordray’s own political ambitions, which may include a bid for Ohio governor.

“New York Attorney General Eric Schneiderman has warned everybody that if the CFPB drops the ball, he and his colleagues in Illinois and California will fill the void.”

—Alan Kaplinsky, Ballard Spahr LLP

During a panel exploring the constitutionality of the CFPB, Brian Marshall, policy counsel for Americans for Financial Reform, predicted that the CFPB would survive the constitutional challenge in the PHH case, but that PHH would be victorious on the statute of limitations argument. He suggested that the D.C. Circuit could take nine to 11 months to deliver its decision on the case, which would be near the end of Cordray’s potential tenure next July.

“There’s a good chance the full DC Court of Appeals will reverse its three-judge panel’s ruling that the CFPB’s structure is unconstitutional, but there’s no question in my mind that the Supreme Court will rule the same way the panel did whenever the issue reaches them,” said writer and former CFPB enforcement attorney Ron Rubin.

Rubin also predicted conduct that he says has been hidden by the CFPB’s stonewalling of Congressional oversight will come to light when a Republican director replaces Cordray, and that could cause the Senate to support some of the legislative reforms in the CHOICE Act.

For Lauren Saunders, associate director at the National Consumer Law Center, the only certainty is that the agency will be different when Cordray departs, no matter the timing. “The question is does [Pres. Trump] appoint somebody who is going to slash and burn, or somebody from the more moderate end?  I hope for the latter, but I can’t predict,” she said. And although, new leadership could mean a stop to the agency’s enforcement actions, particularly against the big banks, Saunders is hopeful that supervision will continue.

“I believe there will be more incremental changes instead of monumental,” added Alan Kaplinsky, partner at Ballard Spahr LLP. “In the regulatory area, I think that’s where they changes are going to be. I don’t expect to see much activity except to undo and delay rulemakings.”

Kaplinsky noted that state attorneys general will be quick to pick up any perceived slack when it comes to the CFPB. “New York Attorney General Eric Schneiderman has warned everybody that if the CFPB drops the ball, he and his colleagues in Illinois and California will fill the void.” Although the AGs haven’t been as active as they were before the CFPB was formed, they will become very active again, Kaplinsky predicts. “You can’t drop your guard. Companies that do that will be sadly mistaken.”

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Image Credits: iStock/olm26250


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