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Hybrid Prepaid-Credit Cards

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Jon Tavares – Senior Compliance Consultant

Well, this is it gang! We’ve finally reached the end of the Prepaid Rule. Today, I will cover the requirements for hybrid prepaid-credit cards.

Let’s start with a few definitions. A hybrid prepaid-credit card is a prepaid card that can access credit from a separate credit feature, or a credit feature structured as a negative balance on the asset feature of a prepaid account. A hybrid prepaid-credit card, with respect to the credit features, is a credit card for purposes of Regulation Z. A covered separate credit feature is a single device offered by the prepaid account issuer (or its affiliate or business partner) that can be used to draw, transfer or authorize credit from the separate credit feature in the course of authorizing, settling or otherwise completing transactions with the card to obtain goods, services or cash or to conduct P2P transfers. A non-covered separate credit feature is any separate credit feature that is not covered.

A financial institution must provide the same account terms, conditions and features to any prepaid account without a covered separate credit feature that it provides on prepaid accounts in the same prepaid account program that have a covered separate credit feature. A financial institution is not prohibited from imposing a higher fee or charge on the asset feature of a prepaid account with a covered separate credit feature than the amount of a comparable fee or charge that it imposes on any prepaid account in the same prepaid account program that does not have such a credit feature.

Unless excepted below, a financial institution cannot structure a hybrid prepaid-credit card to access credit through a negative balance on the asset account. A prepaid card is not a hybrid prepaid-credit card with respect to a negative balance on the asset feature of the prepaid account if the prepaid card cannot access credit from a separate credit feature or the prepaid card can only access credit through a negative balance on the asset feature of the prepaid account where:

  • The prepaid card issuer has established a policy and practice of declining any transaction it reasonably believes the consumer has insufficient or unavailable funds to cover unless:
    • The transaction will cause the asset balance to become negative by $10 or less at the time of authorization, or
    • The prepaid issuer has received an instruction or confirmation for an incoming EFT originated from a separate asset account to load funds to the prepaid account, or where the prepaid issuer has received a request from the consumer to load funds to the prepaid account from a separate asset account but the funds have not yet settled, the transaction will not cause the asset feature to become negative at the time the incoming or requested load amount is authorized
  • The following fees or charges are not imposed on the asset feature:
    • Any fees or charges for opening, issuing or holding a negative balance or for the availability of credit:
    • Any fees or charges imposed only when credit is extended or when there is a negative balance other than the actual costs of collecting the credit extended (if permitted by law), or
    • Any fees or charges where the amount of the fee or charge is higher when credit is extended or when there is a negative balance

A card issuer must not do any of the following until 30 days after the prepaid account has been registered:

  • Open a covered separate credit feature that could be accessible by the hybrid prepaid-credit card
  • Make a solicitation or provide an application to open a covered separate credit feature that could be accessible by the hybrid prepaid-credit card
  • Allow an existing credit feature opened prior to the consumer obtaining the prepaid account to become a covered separate credit feature

If a prepaid account can access a covered separate credit feature and a non-covered separate credit feature, the prepaid account is not a hybrid prepaid-credit card with respect to a non-covered separate credit feature even if the prepaid card is a hybrid prepaid-credit card with respect to another separate credit feature that is covered. The hybrid prepaid-credit card rules do not apply to a non-covered separate credit feature. While a non-covered separate credit feature is not subject to the hybrid prepaid-credit card rules, it may still be subject to Regulation Z, depending on its own terms and conditions independent of the connection with the prepaid account.

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Blog,
Jon Tavares – Senior Compliance Consultant