Beginning next month, the city of Chicago will become the first municipality in the nation to offer a prepaid debit card account as part of its regional transit pass. The Chicago Transit Authority (“CTA”) entered into a contract with Cubic Transportation Systems, Inc., to offer prepaid Mastercard accounts as part of a new Ventra Card that will replace Chicago’s aging magnetic card system used to ride the area’s busses and trains.
The CTA has praised the arrangement as a win-win for the CTA and for city residents, pointing out in a presentation to the American Public Transportation Association that it will be able to replace an aging fare card system without incurring any debt for the city while at the same time providing greater customer service to riders.
But is pairing a prepaid debit card with consumers’ transit cards a good trend? Is it a trend that will expand to other metropolitan areas? The CTA itself recognizes the approach as controversial, and has made public relations a central focus of its roll-out.
There are relatively few laws regulating stored value cards. National Consumer Law Center, Consumer Banking and Payments Law 194 (4th ed. 2009). The Credit Card Act of 2009 introduced some regulation of gift cards, and the Federal Reserve Board has introduced some regulations around payroll cards, but none of these regulations apply to a stored-value card that is part of a transit card (with one possible exception noted below). Id.
Thus, the CTA’s offering will mostly be judged in the court of public opinion, and judged it has been. When the details first broke, the CTA proposal was among the worst prepaid offerings available to the public. The card fees included $2 for a paper statement, a $10/hr. “Account Research Fee” for disputes, a $2 fee to contact customer service, a $2/mo. dormancy fee, a $2.95 reload fee, a $1.50 ATM fee, and when a consumer tires of the endless fees, a $6 “Balance Refund Fee” to cash out of the card (full fees list here). What’s worse is that the CTA hailed the product as an alternative for low-income non-banked consumers, meaning that Chicago’s least able consumers would be funding the transition to the new Ventra system.
In response to fierce criticism, the CTA has rolled back some of the fees, including the reload fee and the $10/hr. “Account Research” fee. However, the renegotiated contract reserves the right of the CTA and Ventra to reintroduce those fees at a later time. Further, as a result of cutting the fees, the CTA reduced its guaranteed share of the fees to zero, preserving what is left for the private contractors building the system. Thus, the CTA will end up incurring the debt it had originally tried to avoid, while preserving the right for private contractors to reinstate fees on consumers at a later date.
There is relatively little regulation of such cards, so the fees are mostly controlled by the contract between the CTA and the private companies building the system. However, the CTA has long had a Transit Benefit Fare Program in place to allow Chicago-area workers to have a portion of their wages deducted, before taxes, and paid directly to the CTA for transit credit, resulting in tax-free transit. For those consumers, those funds will now be transferred to the new Ventra-fare-card/prepaid-debit-card. Is that enough to make the Ventra card a payroll card, regulated by Regulation E of the Electronic Funds Transfer Act? If so, the card would be subject to specific rules regarding access to periodic statements, model disclosure clauses and forms, dispute resolution, and a number of other regulations. As the CTA has not announced plans to adhere to these regulations, the CTA could be setting itself up for liability under EFTA. For example, the account research fee, now dropped, but permitted to be brought back at any time, would run up against § 1005.18(c)(4), which outlines a specific error resolution procedure. Or what about any change to fees? EFTA requires written notice to be delivered at least 21 days before the new fees take effect. Does the CTA plan on aligning to these regulations for all card holders, implementing a separate scheme for Transit Benefit customers, or neither?
There has generally been little litigation over payroll cards in general, and it is unclear how the card will work once released in August, so it may be quite some time until we find answers to these questions. Either the Chicago Transit Authority will set the trend for other metropolitan transit authorities, or will learn an expensive lesson in the meantime. Perhaps both.
About the Author
Michael Wood has been a member of NACA since 2011, when he left Fortune 100 corporate management to attend law school in Chicago, IL. As a law student, Mike externed for now Chief Judge in the Northern District of Illinois, the Honorable Ruben Castillo. Mike also externed for the Illinois Attorney Registration and Disciplinary Commission, and has clerked with several legal aid organizations in the Chicago area. Mike practices as a senior law student under Ill. S. Ct. Rule 711, and is currently working with other consumer advocates to address the debt buyer problem in Cook County, IL, through a new project called Debtors Legal Aid, which provides direct legal services and education to consumers facing debt buyer issues. Mike can be found on twitter @mikewoodondebt, or by email at email@example.com.