Published: August 2009

Prepaid cards: New report finds fees, gotchas

A new report finds that upon close examination, prepaid debit cards are laden with numerous types of fees and other gotchas.

Our friends at Consumers Union, Consumer Federation of America and the National Consumer Law Center have issued an interesting new report on prepaid cards, an alternative payment card.

Prepaid cards are widely marketed as more convenient, safe and cost effective, a straightforward way to manage funds than credit cards or even bank accounts, particularly for consumers who are underbanked or unbanked. The prepaid card industry touts the products as convenient budgeting tools. Prepaid card companies also seek to appeal to consumers who are becoming increasingly dissatisfied with banks. The report finds that prepaid cards function much like traditional debit cards. Money is loaded on the cards by government programs or employers, or users themselves. These cards can be used like a bank account—to make debit purchases, withdraw cash at ATMs and from tellers, receive direct deposits and pay bills online or with checks.

The report notes, however, that the devil is in the details—upon closer examination, these cards are laden with numerous types of fees and other gotchas, making prepaid cards a shaky alternative to a bank account with a debit card. The authors find that claims for certain prepaid card product features, such as small credit lines and credit building, appear to be overstated.

This report discusses the prepaid card market and details needed improvements. The advocacy organizations recommend that:

• The federal regulations under the Electronic Fund Transfer Act must be updated to protect prepaid cardholders when cards are lost or stolen or when funds go missing.
• Prepaid cardholders should be fully protected if the bank issuing the card fails.
• Fees should be simplified and clearly and consistently disclosed so that consumers can see the fees up front and easily compare various cards before handing over any money.

The report concludes that a growing number of consumers are using and relying upon prepaid cards to manage household funds and conduct daily financial transactions, making consumer protections increasingly critical for prepaid cards. Until those protections are required, the authors argue tht prepaid cards are second-tier substitutes for bank accounts which do not provide cardholders with the same stability or protections that all consumers expect and deserve.

Download the full report: Prepaid Cards: Second-Tier Bank Account Substitutes

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Banking   ♦   Credit   ♦   Credit Cards   ♦   Money Management   ♦