In a white paper entitled Thinking Inside The Box: Improving Consumer Outcomes Through Better Fee Disclosure for Prepaid Cards, CFSI Policy Manager David Newville wrote that prepaid cards have two major weaknesses: lack of federally mandated consumer protections and lax fee disclosures. Without improvement in those areas, "prepaid cards are unlikely to appeal to a broader group of consumers," he said.
Improving fee disclosures is especially important because of evidence indicating why low-income consumers abandon banks. Newville cited a Pew Health Group study of low-income households in Los Angeles that showed consumers in one third of those households closed their bank accounts to escape unexpected or unclear fees the banks imposed on them. "It is likely that low-income consumers have similar experiences with prepaid cards," Newville wrote.
The CFSI offered five main recommendations for a standardized fee disclosure box. The box should incorporate:
Newville said over half of the adult population in the United States reads at or below an eighth grade level, while typical credit card disclosures are written at between 10th and 12th grade levels. Therefore, businesses should avoid industry jargon in fee box language. "Thoughtful design and formatting can make it easier for consumers to understand disclosures and more likely to read them in the first place," Newville added.
The box model designed by the CFSI contains 14 fees organized into six categories. Newville said the number of fees was reached by determining the most common fees and limiting them to two or three per category. Simplicity is key as he referenced research from the University of Michigan Law School Empirical Legal Studies Center that showed people typically remember only seven pieces of information at a time.
Newville said regulators could mandate how many fees must be disclosed, but not the types, thus leaving that decision up to prepaid card providers. "This technique would force simplicity while providing each company the flexibility to charge appropriately for the services their customers use," Newville noted.
The CFSI calls for the Consumer Financial Protection Bureau to adopt the center's model fee disclosure box, or one similar, and expand the dialogue with industry stakeholders. "Taking these steps will ultimately benefit consumers and industry alike, as well as increase the potential of prepaid cards to help consumers achieve greater financial stability and prosperity," Newville wrote.
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