I have a new paper at SSRN on “The Economics and Regulation of Network Branded Prepaid Cards,” a fascinating and rapidly-emerging area of the consumer payments economy. One interesting factor is that, by pushing people out of bank accounts, the Durbin Amending is one of the leading causes of the growth of this market while also being one of the leading barriers to consumer welfare and competition in this market. Quite an achievement for a special-interest provision smuggled in at the end of the legislative process. Here’s the abstract:
General-purpose reloadable prepaid cards have been one of the fastest-growing sectors of the consumer payments marketplace in recent years. Their importance has accelerated as a consequence of new regulations enacted in the wake of the 2008 financial crisis. This increased use of prepaid cards has also increased angst among regulators, especially regarding the number and size of fees on prepaid cards. State and federal regulators as well as Congress are interested in imposing new regulations on prepaid cards. These calls for regulation, however, have proceeded in a largely fact-free environment. This paper describes the current economic and regulatory landscape for prepaid cards. The market appears to be robustly competitive, as recent years have seen declining costs and increasing functionality as well as entry of major players such as American Express and several large banks. Nor is there any evidence that consumers systematically err in the cards that they choose. Absent a demonstrable competitive market failure or systematic consumer abuse, prescriptive regulation of the terms and substance of prepaid cards would likely have unintended consequences that would exceed the benefits to consumers. On the other hand, there are some regulations that might be enacted that could promote competition and consumer welfare in this rapidly evolving market.