[Special Note: A previous version of this posting indicated that the effective date of the California law discussed below was January 1, 2023. However, based on information recently provided by the California Legislature, the effective date for the new law is January 1, 2022.]
Long Story Short: Staring on January 1, 2022, challenger bank programs with overdraft programs that include any fee (whether voluntary or involuntary) will be prohibited from accepting California benefit payments via direct deposit. The most immediate impact will be on child support payments (since other state benefit programs don’t currently offer direct deposit). Banks offering accounts directly will not be affected.
Long Story: The California Legislature recently enacted a new law that specifically targets challenger bank programs offering overdraft programs that charge fees (voluntary or involuntary), basically prohibiting such programs from receiving many California public assistance payments via direct deposit, such as unemployment, child support, disability and public assistance payments. For brevity (and Shakespeare once noted that brevity is the soul of wit), we’ll collectively call these payments “state benefit payments.”
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- To me, the legislation is notable since it’s the first law that I can remember that intentionally regulates challenger bank accounts (which are typically offered by a FinTech on behalf of a bank) differently from accounts offered directly by banks.
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Under the new law, a prepaid, DDA or savings account offered by, or through, an entity other than a bank (challenger bank programs, that “entity” is you) cannot accept a California state benefit payment unless the account meets all of the following:
- The account is held at an FDIC- or NCUA-insured financial institution.
- The account qualifies for direct or pass-through FDIC deposit insurance (banks) or NCUA share insurance (credit unions).
- The account complies with all the requirements and consumer protections that apply to accounts under Regulation E.
- The account is not attached to any credit or overdraft feature that is automatically repaid from the account, unless one of the following is met: a) the credit or overdraft feature has no voluntary or involuntary fee/charge; or b) the credit or overdraft feature complies with the requirements for credit offered in connection with prepaid accounts under Regulation Z (which essentially bans overdraft programs on prepaid programs except in some narrow instances).
Sooooo…in a nutshell, what does all this mean? The first three requirements are basically table stakes in challenger bank programs, and most programs probably already comply with those requirements.
However, the ban on overdraft programs with fees is the wrinkle. Note that the law’s language on overdraft fees is very broad – the prohibition extends to any overdraft-related fee “whether direct, required, voluntary or involuntary.” So, any challenger bank program with an overdraft protection program that charges any sort of fee (whether voluntary or involuntary) will be prohibited from receiving California state benefit payments.
Before panic sets in, I should note that according to a California Senate analysis of the new law, most state benefit payments are not currently payable by direct deposit. The report indicates that unemployment benefits, disability benefits and public assistance funds are currently paid through “prepaid cards that comply with existing law,” with such prepaid cards apparently being state-sponsored debit cards.
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- The analysis also takes a swipe at challenger bank programs, stating that “certain nonbank prepaid card providers have started to offer so-called ‘bank accounts’ that do not comply with the federal and California rules for prepaid accounts. These fake ‘bank accounts,’ which are sold by alternative financial service providers, are designed to encourage overdraft fees that put low-income consumers in a vulnerable and endless cycle of debt.”
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This comment, of course, sets aside the fact that these bank accounts are ultimately offered by….banks. Banks which are regulated by the OCC, FDIC, the Federal Reserve and/or state banking departments, and which are under constant supervision from these agencies. But, we digress…..
However, the report also suggests that the state may “soon” make direct deposit an option for receiving unemployment and disability benefits. So, keep an eye on this one.
Importantly, though, the report indicates that some child support payments are currently being paid via direct deposit. As such, challenger bank programs with overdraft programs that charge fees (remember…any voluntary or involuntary fees are covered) may be unable to accept direct deposits from the State of California in connection with child support payments once the law takes effect.
Speaking of the law taking effect…the new law’s effective date appears to be January 1, 2022.
Banks that offer accounts directly to customers on their own websites or branches are basically off the hook – none of the stuff above applies to banks offering accounts directly.
If nothing else, the new legislation signals that policymakers are becoming more focused on challenger bank programs, and this likely won’t be the last effort to regulate FinTech challenger bank programs differently from traditional bank programs.
Questions? Email me at brian@axell.law. Thanks for reading!