Daily News: Lessons from the RushCard Fiasco: New York Needs Stronger Protections on Prepaid Debit Cards

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By Deyanira Del Rio

If there’s a silver lining to the recent RushCard debacle, it’s that it has exposed systemic failings in the prepaid debit-card industry and provided the clearest and most harrowing illustration yet of why strong oversight is needed.

In case you missed it, over an agonizing period in October, Russell Simmons’ RushCard company left thousands of people stranded — in some cases, for up to two weeks — without access to their wages, Social Security benefits and other funds loaded onto their cards. That breakdown led to a cascade of financial crises for families who were unable to pay for rent, medicine, food or gas.

Many RushCard customers reported facing utility shut-offs, steep late fees to creditors and threats of eviction. The economic fallout for these families — to say nothing of the stress they have endured — will no doubt continue for months, even as RushCard officials assure them that the technology glitch responsible for the meltdown has been resolved.

Far from a mere glitch, the RushCard breakdown is a devastating result of our unequal financial system, in which those who can least afford it are relegated to costly and poorly regulated services. Nationally, one in four prepaid debit cardholders earns less than $15,000 annually, and nearly half earn less than $30,000. One can safely assume that a wealthy person whose bank account was improperly drained of funds would not have to wait for weeks, relying on Tweeted updates from executives, to get relief.

At the federal level, the Consumer Financial Protection Bureau is taking an important step by developing new rules to safeguard funds on prepaid cards. Strong federal rules have long shielded credit cardholders, as well as people who use debit cards linked to bank accounts, by providing important error resolution rights and other protections. Most prepaid debit cardholders, by contrast, have been forced to rely on voluntary and inconsistent consumer protections offered by card issuers. This two-tiered system must end.

Here in New York, the Department of Labor has rightly proposed cracking down on employer-issued prepaid debit cards that require workers to pay fees to access their own wages. An estimated 13,000 businesses in New York State currently pay workers on prepaid cards; these numbers are expected to grow as more employers look for ways to cut their payroll costs.

In a 2014 survey conducted by the New Economy Project, New York Public Interest Research Group and Retail Action Project, workers paid on cards said they were charged a laundry list of fees, including monthly maintenance fees, ATM and point-of-sale fees, inactivity fees and fees as high as $10 to request a paper statement. One in four workers was hit with overdraft fees, even though prepaid debit cards are marketed as a way to control spending and avoid costly bank overdraft charges.

The Labor Department’s proposed rules, expected to be finalized by early next year, would ban unfair card fees that deplete workers’ pay — sometimes to below the minimum wage. They also would prohibit employers from forcing workers to receive their wages on cards, and ban kickbacks from prepaid card issuers to employers. The rules would address widespread and well-documented abuses, and are backed by community, labor and civil rights groups across the state.

Russell Simmons has publicly spoken out against New York’s proposed pro-worker rules. Among his complaints: The amount of time and money it would take for his multi-million-dollar company to change its business practices to comply. Not surprisingly, banks and credit card companies, among others that reap lucrative profits from prepaid card programs, are also fighting the regulations.

Back to that silver lining: Let’s hope that the scale and severity of the RushCard fiasco serve as a wake-up call to the prepaid card industry and regulators alike. Until meaningful rules are in place to rein in deceptive and abusive practices, prepaid cards will remain inferior financial tools and reinforce our segregated banking system. It’s time to end financial exploitation of the working poor and ensure real economic access and inclusion.