The Durbin Amendment will stifle growth of reloadable general-purpose prepaid cards although it was originally believed they would be exempt from the new debit card interchange rules, according to financial experts.
Reloadable cards branded by Visa or MasterCard have been on the rise in recent years. Under the final rule, the cards are exempt from the new law only if they don’t charge for overdraft fees, let the first ATM transaction each month be free and do not allow underlying funds to be accessed by any means other than the card itself, DigitalTransactions.net reports.
“Given this change, the opportunity for new growth at the expense of debit card companies has been significantly curtailed,” Madeline Aufseeser, a senior analyst at Boston-based Aite Group LLC, wrote in a report released this week, according to DigitalTransactions.net.
Reloadable card issuers typically provide offerings similar to checking account advantages by allowing cardholders to make electronic bill payments, write checks and access their accounts through the automated clearing house. These methods will now trigger the law’s stringent interchange cap, which will be set at 21 cents plus 0.05 percent of the transaction value effective Oct. 1.
The law’s new restriction on account access is new and “came as a surprise,” Aufseeser wrote in her report, DigitalTransactions.net reports.
Aufseeser wrote that big issuers will choose between offering their current lineup of access features and accept lost revenue or look for ways to offset the lost revenue with fees for other services. Another option would be for the big issuers to join in co-branded arrangements with smaller issuers who are not affected by the restrictions. Cobranded cards may be interpreted as decoupled debit cards which are included in the restrictions – even for small issuers, DigitalTransactions.net reports.
The Fed sought to avoid covered issuers evading the interchange cap by using prepaid products to mimic the features of demand-deposit accounts. Some observers said the move will make it difficult for the underbanked that commonly rely on reloadable cards.
“If the prepaid card is designed for people who are credit-challenged, to help them into the financial mainstream, this is going to make it more difficult,” Ben Jackson, a senior analyst at Mercator Advisory Group Inc., in Maynard, Mass., said, according to DigitalTransaction.net.
Wal-Mart Stores Inc., originally thought to be victor in the interchange battle as a retailer who pays high interchange fees, will feel this impact as it sponsors one of the most successful reloadable prepaid Visa and MasterCard products in the country.