Enough Already! Financial Sector Readying for More Fed Regulations
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Second quarter earnings for the financial sector were disappointing to say the least, with banks and similar institutions struggling to post revenues that were higher than they were for the same period last year. It’s not surprising that many of them are seeking as many ways as possible to deal with the revenue declines, but a new federal agency may serve to cause much of that revenue to dry up, too.
The agency is the Consumer Finance Protection Bureau. Created through the infamous Dodd-Frank Act of 2010, the agency is already making leeway in cracking down on banks. Its most recent action came this week when it began reviewing comments about the prepaid card industry, which traditional and non-traditional banks had began tapping because of the hefty revenues that can be reaped.
By just glancing at some of the statistics for the industry, you can see why its proponents may not be very happy about any snooping around in it that could lead to ways to limit its growth. Since 2010, the annual growth prepaid rate for the market was 42%, and it is on track to continue growing at that rate through 2014, according to the Mercator Advisory Group. In 2011, $57 billion was loaded onto the cards, and that amount is projected to top $167 billion by 2014.
This kind of growth makes the industry ripe for corruption. That, coupled with the fact that, historically, the cards have been used by those most vulnerable to being taken advantage of – those with lower income and those with poor credit – has led to calls for government regulation. This is where the CFPB comes into play, and whether you like it or not, its policies are bound to have an effect on every institution that offers the cards, including traditional and non-traditional banks.
As the industry has expanded, it’s also grown up. It’s no longer made up of just seedy companies trying to make as much as they can from people who have no choice when it comes to their banking needs. For example, most recently, J.P. Morgan (NYSE: JPM) joined other big boys like Wells Fargo (NYSE: WFC), in offering prepaid cards. With the entry of the large banks has come more respect for the industry. Their entry has also brought down the number and dollar amount of the fees associated with the cards that had made the industry so notorious.
Bank officials say that their entry is a matter of trying to serve a group of customers who may otherwise not be able to qualify. Furthermore, offering prepaid cards gives the banks a chance to give their regular customers options. As more consumers have grown tired of the high fees from traditional banks, they are turning to prepaid cards.
For the most part, the fee schedules of the larger banks are lower than those of the companies that got the first run on the industry. Those other companies include Green Dot (NYSE: GDOT) and NetSpend Holdings (NASDAQ: NTSP). These companies offer a wide array of products and services to people who are considered unbankable – those who can’t secure traditional checking accounts and loans. As industry leaders, Green Dot and NetSpend Holdings have market capitalizations of $827 million and $701 million, respectively.
Although the two enjoy raking in the money from the prepaid card industry, Green Dot seems stronger. For example, its earnings per share are $1.32 compared to NetSpend’s $.22 per share.
I last wrote about a serious coup that NetSpend was able to pull off. It has partnered with PayPal to bring its prepaid MasterCard to 7-Eleven as the exclusive program manager and processor for the card.
The CFPB is taking issue with prepaid cards not enjoying the same protections under federal law as debit cards linked to checking accounts. Specifically, the CFPB is trying to learn more about the practices of prepaid card issuers when it comes to disclosure, unauthorized transactions and some of the features that the issuers often promote in marketing their cards.
There is no word as to when the CFPB will make its recommendations, or if it will make any at all. In the meantime, I’m keeping my eye on the banking sector with the hope that more banks will get in on the action. Considering that fees have come down and industry players are becoming increasingly transparent, I wonder about the need for any regulatory steps by the CFPB. There will be scoundrels in every industry, and consumers should be protected. Hopefully, players in this industry will continue to make strides to shake the negative reputation that has plagued it. If not, this new, very powerful, federal agency will force them to, and that will likely be very harmful to their financial bottom lines.
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