When’s the last time you read the terms and conditions for your checking account? If you’re like most Americans, including me, the answer is probably never. But if you went online right now and checked it out, you might be surprised by what you find.
According to research released earlier this year by the Pew Health Group, 111 pages is the median length of account disclosure documents among the 10 largest banks in the country. If that wasn’t bad enough, these documents are also usually not written or laid out in the most consumer-friendly manner; dense, small text and legalese is more the norm. And just try to lay your hands on a copy when you need it!
Confusing disclosures are bad enough when it comes to checking accounts, but can be even more detrimental when applied to prepaid cards. Users of this product tend to have lower incomes and often live from paycheck-to-paycheck. They need to be able to anticipate the cost of using a specific prepaid product so they can avoid going into the red.
Our organization recently released a paper outlining three major recommendations for improving consumer protections for prepaid cards. The first two would extend fundamental consumer protections for bank accounts to prepaid cards: FDIC Insurance and Regulation E (the version that currently applies to payroll cards). The third recommendation is to improve fee disclosure by requiring prepaid providers to list all their fees in a box, similar to the Schumer Box for credit cards.
We believe that requiring all prepaid providers to put their fees in a standardized box with an easy-to-understand format would simplify the effort by consumers to understand the total costs of using different prepaid products and find the product most appropriate to their individual needs. The fee box would have to be prominently displayed on the packaging of all prepaid cards sold in retail locations and easy to find on the Websites of prepaid card providers. This way, consumers would be able to easily compare different products in an apples-to-apples manner before deciding which one to buy.
We are currently in the process of developing a model fee disclosure box for prepaid cards, based on research on prepaid card fees and best practices in the disclosure of costs for financial products. Requiring banks to take similar steps for checking accounts might make sense as well. Pew recently released a model one-page disclosure box for checking accounts. One day, there could even possibly be a single type of disclosure box for both checking accounts and prepaid cards, given that they are increasingly being used in similar ways.
The newly-formed Consumer Financial Protection Bureau (CFPB) has made improved disclosures for financial products a major priority, calling for a reduction in disclosure paperwork for credit cards and releasing model two-page mortgage disclosure forms for public comment earlier this year. They are now beginning to look at ways to improve fee disclosure for prepaid cards and may turn to checking accounts as well at some point in the future.
There is evidence that consumers want this too. According to a poll by the Pew Health Group, about three-quarters of checking account holders, including 66% of Republicans and 81% of Democrats, would like to see regulations requiring improved disclosures. Making these changes may also encourage some of the one-fourth of American households defined by the FDIC as underbanked to adopt prepaid cards or bank accounts. Despite higher costs, many of the underbanked currently prefer to use services like money orders and check cashing in part because the fees are more transparent than products or services offered by commercial banks.
Prepaid providers and banks should welcome these changes as well. Clear and easy-to-understand fee structures and account disclosures would probably save them money in the long run with fewer expensive calls to customer service. Better yet, more consumers would be attracted to their products and be happier with them, sticking with their prepaid card or bank account longer instead of dropping it out of frustration after getting unexpectedly dinged by fees one too many times.
Banks and prepaid providers shouldn’t just wait for new regulations to arrive either. They should lead the way and utilize their knowledge of their customers to offer best practices and models for simplified disclosures and fee boxes. Some have already begun to do this, but more should. Regulators like the CFPB can learn from and build on these examples to design smart and effective new disclosure regulations.
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