Prepaid Cards on the Hot Seat

May 24, 2011

Florida Attorney General Pam Bondi is investigating five prepaid debit card companies following a rash of cardholder complaints about unfair and deceptive sales practices.

The state AG's criminal investigations office has issued subpoenas to the five companies requesting information about prepaid debit card fees, and in some cases promises that may have been made regarding customers' credit scores. The office said the five prepaid companies being investigated have been the subjects of complaints filed by cardholders. The five are:

• First Data Corporation,

• Green Dot Corporation,

• Account Now Inc.,

• Netspend Corporation, and

• Unirush Financial Services LLC.

"Failing to disclose fees is essentially stealing money from consumers," Bondi said in a statement released last week. "We will aggressively investigate these practices and ensure that Floridians are protected from hidden fees and charges."

Prepaid debit cards have become hugely popular, especially those branded by the major card companies, Visa and MasterCard.

Government agencies and employers in growing numbers have turned to prepaid cards as a lower-cost alternative to issuing payroll/benefits checks to the unbanked. For their part, the prepaid card companies often market their card programss as a consumer alternative to high-priced and inconvenient banks.

Use of prepaid debit cards by American consumers grew at a compound annual rate of 21.5% between 2006 and 2009, outstripping growth in all other non-cash payment categories, according to the 2010 Federal Reserve Payments Study. 

The Fed's study shows Americans made 6.0 billion payments using prepaid debit cards in 2009, up from 3.3 billion in 2006. General purpose (Visa, MasterCard) and electronic benefits transfer (EBT) cards accounted for about 55% of that total.

The popularity of the prepaid debit cards has raised many concerns, however, with user fees and ambiguous disclosures topping the list. The Credit CARD Act of 2009 addressed some of these concerns by limiting fees and empowering the Federal Reserve with rulemaking authority over general purpose prepaid cards. Apparently, the legislation didn't go far enough, however, or companies are finding ways around the rules.

The Florida AG's Office stated that it "has reviewed complaints alleging that the companies servicing prepaid debit cards often fail to disclose numerous fees. In some instances, every transaction a consumer makes using a prepaid debit card may be subject to a hidden fee." The statement also encouraged consumers in the state "who believe they may have been victimized" by hidden fees on prepaid cards to file a complaint with the office.

2.5 billion adults, just over half the world's adult population, do not use financial services to save or borrow

^{_{The Financial Access Initiative}}