Are Prepaid Cards a Good Deal for Unbanked Americans?

October 10, 2010

Prepaid debit cards continue to take the market by storm, and are being heralded by banks, card companies, retailers, even government agencies, as a tool for moving the financially underserved into the financial mainstream. But are these new cards a good deal for consumers?

Consumers Union thinks not. The non-profit consumer group and publisher of Consumer Reports, warns that prepaid cards can be loaded with fees and weak on consumer protections.

"Prepaid cards come with a long list of fees that are often hidden deep in the fine print," Michelle Jun, a Consumers Union staff attorney said last month in releasing a new report, Prepaid Cards: Second-Tier Bank Account Substitutes. Jun. who authored the report, added that "those fees can add up quickly" and cardholders "may be vulnerable to losing their money" when the cards are lost or stolen.

Prepaid cards can be retailer-specific, or general purpose branded cards. The latter carry the logo of a major card brand (MasterCard, Visa, American Express or Discover), are reloadable, often used for applications like payroll and benefits distribution, and can function as credit/debit and ATM cards. Unless issued by an employer or government agency, most cards carry an initial purchase fee; most also carry assorted other fees.

According to the Federal Reserve Bank of Boston, 17.2% of Americans were using prepaid cards in 2008, adding $247.7 in value to their cards.

The Boston Consulting Group estimates that worldwide prepaid spending will top $680 billion by 2015, with more than half of that spending in the U.S. and Canada.

Meanwhile, Green Dot Corporation, the largest provider of general purpose (branded) prepaid cards, revealed in a filing with the Securities Exchange Commission earlier this year that it had booked $235 million in prepaid card sales during the 12-month period ending July 31, 2009.

Too Many Gotcha Fees

Consumers Union reviewed the terms and conditions for 19 different prepaid cards, and found consumers "face multiple fees and other costly 'gotchas'," the group said. Here's a sampling of what was found:

• Activation fees are assessed by 12, ranging from a low of $3 at Walmart to a whopping $39.95 for something called the First Vineyard card.
• Monthly fees are charged by 16, ranging from $2.95 to $9.95, although some companies will waive these fees for minimum balances or pay-as-you go transaction pricing.
• Fees as high as $2.50 for withdrawing cash from ATMs are assessed by all 19.
• ATM balance inquiry fees, ranging from 45-cents to $1.00, are charged by 18.
• Fees for mothly paper statements are charged by 15, and range from $1.00 to $5.95
• Nine of the 19 charged inactivity fees.
• One program actually charges cardholders $3.95 to speak with a customer service rep and another charges $1.00.
• Overdraft, or "shortage" fees are assessed by 13 of the 19.

Consumers Union cited other problems, too, such as lack of FDIC insurance guarantees. And the group questioned claims that prepaid cards help consumers build credit records, suggesting many card issuers are not diligent about providing this information to mainstream credit reporting agencies.

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