Issuers Win And Lose As the Fed Puts Reg E’s Stamp on Payroll Cards

In the Federal Reserve Board's final rule that extends Regulation E provisions to the fast-growing payroll card sector, electronic transaction reporting won out over paper statements, but issuers may take on added risk with a longer time period for dispute resolution, experts say. After a two-year process that involved taking comments from consumer and industry groups and issuing an interim rule, the Fed in an Aug. 24 ruling formally declared that payroll card accounts established directly or indirectly by employers to pay employees are accounts subject to Regulation E, the Fed's body of rules for enforcing the Electronic Fund Transfer Act. Reg E imposes duties on financial institutions and sets rules for resolving transaction disputes, among other things. For the most part, the final payroll card amendment, which takes effect next July 1, differs little from an interim rule the Fed published Jan. 10, though it does provide an extended dispute period in some cases. Consumers use payroll cards much as they use conventional debit cards: to get cash at ATMs and make purchases if the card bears the logo of Visa, MasterCard, or a PIN-debit point-of-sale network. Financial institutions and processors that issue or market payroll cards were most concerned about getting a waiver from Reg E's mandate that account holders be given periodic paper statements. Providers argued that paper statements are impractical, since many payroll cardholders are difficult to track because they don't have checking accounts and move frequently. The final rule continues the interim rule's provision that providers will have met the periodic-statement requirements if they offer balance information on the telephone, provide Web sites that can pull up 60 days of transaction detail, or mail a paper statement, also with 60 days of transaction data, upon the cardholder's request. “It looks like they listened to the concerns on whether or not it made sense to do paper statements, and they were flexible on that,” says Katy Jacob, research director for The Center for Financial Services Innovation, a nonprofit affiliate of Chicago-based community bank-holding company ShoreBank Corp. that works to expand financial alternatives for the unbanked. While payroll cardholders generally have 60 days to dispute transactions, the final rule adds a provision that they could have up to 120 days to report an error after the alleged erroneous transaction was credited or debited to the account if the provider doesn't track when cardholders access their accounts electronically. “This approach allows an institution to comply with the regulation without tracking when consumers electronically access their account information and, at the same time, ensures that consumers will have at least 60 days from the date of every transaction listed in the electronic or written statement to report an error,” the ruling says. The practical effect of this provision is unclear, but keeping the dispute-resolution window open longer does carry some risk for issuers, notes Eva Weber, an analyst at Boston-based research firm Aite Group LLC. “That potentially could be more costly for financial institutions,” she says. In commentaries to the Fed, some consumer advocates urged the regulatory body to extend Reg E coverage not just to payroll cards, but also to other types of prepaid products such as gift cards and health-care account cards. The Fed turned them down but kept its options open regarding future regulation. “The Board will continue to monitor the development of the prepaid card market and could reconsider whether the current treatment of these products under Regulation E remains appropriate over time,” the Fed said in the ruling. Earlier this month, the Office of the Comptroller of the Currency, another banking regulator, issued disclosure rules that bank issuers of gift cards must follow (Digital Transactions News, Aug. 16). The Fed also said in regard to payroll cards that it would not define employers and third-party service providers as financial institutions because they typically do not hold the card account. If such firms did take on actual account-holding functions, they would be considered financial institutions subject to Reg E, the Fed said.