Economy

The RushCard Fiasco Exposed The Danger Of Unregulated Banking

CREDIT: Rob Latour/Invision/AP

RushCard owner Russell Simmons

Last October, users of the prepaid debit card accounts offered through RushCard, owned by rap mogul Russell Simmons, found themselves abruptly locked out and cut off from their money for weeks thanks to a technological glitch as the company changed processing vendors. The company gives people without traditional bank accounts a way to store their money and entices customers by promising to give them access to direct deposited paychecks faster than through a bank.

At the time, scores of customers took to social media to complain and shared their stories about running out of food, facing eviction and falling behind on other bills, and scrounging for loose change in their couches to get by. But there was no way to know exactly how big the problem was.

On Tuesday, however, the Consumer Financial Protection Bureau — which is investigating what happened — released a report offering some evidence about how many consumers struggled under the RushCard outage.

CFPB’s latest monthly complaint report looked at complaints sent to the agency between November and January, with a particular focus on prepaid debit cards. It found a 62 percent increase in complaints about these products compared to the same time period a year before, with a total of 238 complaints. That comes on top of the previous complaint report, which found a staggering 233 percent uptick in complaints about prepaid products between October and December, or 459 total. As a press release from the CFPB notes, “The report shows that consumer complaints about prepaid products spiked in recent months as an increased number of customers complained of being frozen out of their accounts.”

And the most recent complaint report makes it clear that RushCard is to blame for that big spike in issues. By far the company that was cited the most was Empowerment Ventures LLC, the parent company of RushCard. There were an average of 241 complaints lodged against the company per month between September and November; the company with the next-highest number of average monthly complaints came in at 19. That represents a big departure for Empowerment Ventures, which saw zero complaints filed against it in the same time period the year before.

This information will almost certainly factor into the CFPB’s investigation, although a spokesperson told ThinkProgress the agency can’t comment on ongoing or potential enforcement activities. RushCard’s parent company has been fighting that investigation, filing a petition in November to change or do away with a demand for information sent by the CFPB saying that it couldn’t meet the deadlines to send over documents and that the request was overly broad.

The outage exposed some of the differences between traditional accounts and alternative banking products like prepaid debit cards that fall outside the purview of most regulations. While RushCards are FDIC-insured, that’s not a requirement. Many prepaid debit cards are not, and others don’t have error protection or liability for loss or theft.

The cards also aren’t subject to limits on fees enacted under the Dodd-Frank financial reform bill. So they often come packed with them: refillable cards taken out over the internet charge an average of $4.22 to open and maintain plus fees for other transactions, costing customers between $10 and $12 a month just to use them. RushCards cost between $3.95 and $9.95 to open and have a number of other fees for transactions, withdrawals, and “maintenance” if cards aren’t used often enough, depending on the plan customers select. These fees add up quickly, particularly given that most people who use them make less than $25,000 a year.

Beyond investigating RushCard, the CFPB has had its eye on the prepaid debit card market. Last year it proposed rules that would regulate them by giving upfront disclosures that are clear about the costs and risks, limit customers’ losses in the event of loss or theft, require them to investigate and resolve errors, and provide free access to account information.