Reloadable prepaid debit cards represent one of the fastest-growing segments of the financial services industry.
Last year, Michael Abukhader’s 12-year-old son, Jacob, received a $30 NASCAR prepaid Visa card from an aunt who thought it would provide a convenient way to give him cash for birthdays and other events. But once Abukhader, who lives in Queen Creek, Ariz., reviewed the terms of the card, he closed the account.
The card charged a fee of $6.95 for the first purchase, plus a monthly fee of $5.95. Other fees included $2.50 for a withdrawal from a non-network ATM and $4.95 to replace a lost or stolen card. Abukhader explained to his son that after six months, the $30 card would contain a negative balance.
For Jacob, who was initially excited about having his own credit card, “It was a cold, cruel lesson about credit and fees and ‘buyer beware,’ ” Abukhader says. “It was very sobering.”
Reloadable prepaid debit cards represent one of the fastest-growing segments of the financial services industry. The total amount of branded prepaid cards is expected to exceed $440 billion by 2017, quadruple the estimated value in 2009, according to independent research commissioned by MasterCard. Nearly one-third of consumers own some kind of prepaid card, according to a 2009 survey by the Federal Reserve Bank of Boston.
Even the federal government has embraced the product. Last week, Treasury announced that it will provide 600,000 low-income taxpayers with a prepaid debit card they can use to get direct deposit of their tax refunds.
Lana Willis, 39, of Covina, Calif., says a Green Dot prepaid card has helped her sister, Monica, who is 34 and mentally challenged, remain financially independent. Willis, who has cared for her sister since their mother died more than 20 years ago, shares a Green Dot card with Monica and reloads it with money every couple of weeks. She’s able to track her sister’s spending and balance online and doesn’t have to worry about overdrafts, which were a problem when Monica had a checking account.
“It has helped her live within a budget and gain independence,” Willis says. “She feels good when she whips out her little gold card.”
Consumer groups and some lawmakers contend that prepaid cards lack some of the protections offered by traditional bank and credit union accounts, and often include an assortment of fees that can rapidly erode a card holder’s balance.
The concerns have led to calls for greater regulation of prepaid cards. In a speech late last year, Federal Reserve Governor Elizabeth Duke said financial regulators need to more closely monitor prepaid cards to see if consumers are adequately protected. Sen. Robert Menendez, D-N.J., introduced legislation last year that would limit the fees prepaid cards charge. And Sen. Richard Durbin, D-Ill., has called on the new Consumer Financial Protection Agency to regulate the products. “There are a lot of unsuspecting people who are buying these cards,” he says.
Prepaid card issuers say the cards are considerably less expensive, and much safer, than check-cashing stores, pawn shops and other businesses used by the more than 17 million Americans who don’t have bank accounts.
Ricky Clark, 24, of Griffin, Ga., says he switched to a NetSpend prepaid card several years ago because he was frustrated with how long it took for Bank of America to clear checks deposited in his account. On one occasion, he was hit with a $32 overdraft fee because a check hadn’t cleared.
Clark says funds direct-deposited to his NetSpend card are available much more quickly, and it provides most of the services he got through his Bank of America account. “I use it for purchases, paying bills, online shopping, gas,” he says. Clark receives e-mail alerts that help him keep track of the balance.
In addition, competition has driven down the cost of prepaid cards, says Tim Murphy, chief product officer for MasterCard.
For example, in 2009, Walmart reduced the activation fee for its MoneyCard to $3 from $8.94. Maintenance and reloading fees were also reduced to $3 each. Compared with the fees charged by a check-cashing store, or even a basic checking account, Murphy says, Walmart’s MoneyCard looks “quite good and reasonable.”
Still, there are plenty of examples of prepaid cards that cost more than the lowest-price offerings. Earlier this month, syndicated radio host Tom Joyner partnered with prepaid card issuer PreCash to offer a card that charges a $9.95 activation fee, an $8.95 monthly fee, and $2.50 for ATM withdrawals. The REACH card doesn’t charge a reloading fee, but individual retailers may charge reloading fees ranging from 95 cents to $4.95, according to PreCash spokesman Jeffrey Fowler. Customers can avoid that fee by arranging for direct deposit to their cards, Fowler says.
Other concerns about reloadable prepaid cards:
•À la carte costs. In addition to monthly fees and activation costs, many prepaid cards charge customers for services that most bank and credit union customers take for granted, says Suzanne Martindale, policy associate for Consumers Union. Activities that could trigger fees include ATM withdrawals, even if they’re in-network, balance inquiries (including those made at an ATM), monthly paper statements or calls to a customer-service representative. Card holders who decide the fees are too high may pay an additional fee to close the account.
Prepaid card issuers point out that banks and credit unions are increasingly adopting similar fees, particularly for customers with low balances. A recent proposal by the Federal Reserve Board to slash the fees retailers pay for debit card transactions has forced banks to review the cost of every service they charge, says Robert Hammer, chief executive of R.K. Hammer, a bank advisory firm.
Last week, Bank of America announced a pilot program that will introduce several different checking accounts with monthly fees ranging from $6 to $25. Citigroup and JPMorgan have also introduced new fees.
“Free checking is a goner — that’s a certainty,” Hammer says.
•Hard-to-find fees. Packaging on reloadable prepaid cards, which are typically sold in convenience stores, drugstores and other retailers, often displays the activation fee and monthly fee. The packaging may also promote the things the card doesn’t charge for, such as direct deposit, Martindale says. But to get the full schedule of fees, consumers usually have to go to the card issuer’s website, she says.
Consumers who take the trouble to find a card issuers’ website often have to dig deep to find the complete list of fees, says Martindale, who has researched dozens of prepaid offerings. The information is rarely featured on the main page of the website, she says. Sometimes, consumers won’t get to the fees until they fill out an application, she says.
“For the most part, it’s very difficult to find out what you’re getting into before you buy the card,” she says. This makes it difficult for consumers to compare the costs of prepaid cards, Martindale adds.
•Celebrity ties. In an effort to appeal to young consumers, several issuers have launched cards featuring popular TV, sports and music personalities. But celebrity endorsements cost money, and that’s often reflected in the cost of the card.
For example, a prepaid card endorsed by the Kardashian sisters last year disappeared faster than some of the reality stars’ boyfriends after consumer advocates and then-Connecticut attorney general Richard Blumenthal lambasted the card’s fees. The Kardashian card cost $99.95 for a 12-month plan, plus additional fees for ATM withdrawals, balance inquiries and calls to a customer-service representative. (The card’s creator, Revenue Resource Group, recently filed a $75 million lawsuit against the Kardashians for withdrawing their endorsement.)
In December, Myplash launched the Teen Prepaid MasterCard, featuring “the hottest music artists, action sports athletes and brands,” as well as the characters from “The Twilight Saga,” according to the card’s website. Myplash is considerably less costly than the Kardashian card: There’s no activation fee, and card holders pay a $4.95 monthly maintenance fee, plus $4.95 to reload the card and $1.50 for ATM withdrawals. But it’s still more expensive than some of the lowest-cost cards, such as Walmart’s MoneyCard or nFinanSe’s prepaid card.
•Potential overdraft fees. Since last summer, banks and credit unions have been prohibited from charging fees to cover debit card and ATM overdrafts unless customers sign up for the service in advance. Customers who don’t sign up will have purchases that exceed their balance declined at the register.
These rules, enacted by the Federal Reserve in response to strong criticism of high overdraft fees, don’t extend to prepaid debit cards. While card holders probably won’t see any reference to overdraft fees in the customer agreements, some prepaid cards charge “shortage” fees if the card holder spends more money than the amount stored on the card.
Thirteen of the cards surveyed by Consumers Union said they’ll charge shortage fees if the card holder overspends. Some of the cards didn’t disclose the amount of the fees; among those that did, fees ranged from $14.95 to $25. The Club America prepaid card, a card targeted at soccer fans that was introduced earlier this month, charges card holders $29.95 if a purchase exceeds the amount on the card, plus the amount of the negative balance.
Even their harshest critics say prepaid cards could provide a worthwhile financial tool for consumers who can’t afford to set up bank accounts or simply don’t trust banks. Durbin says they’re a viable alternative for consumers who don’t have checking accounts, but says more consumer protections are needed.
“If they (prepaid cards) are properly managed and they only have legitimate fees and expenses associated with them,” he says, “it certainly is a benefit over the rip-offs many low-income people face.”
Via USA Today