Prepaid Debit Cards: More Plastic, More Problems?
A Visa debit card - Prepaid debit cards are the fastest growing of all electronic payments, according to the Federal Reserve System. (Matt Rourke / AP)
There's a new kind of plastic on the rise.
Prepaid debit cards are the fastest growing of all electronic payments, according to a new report by the Federal Reserve System. U.S. consumers loaded $28.6 billion on reloadable prepaid debit cards last year -- more than double what they did in 2007.
In an increasingly card-based economy, issuers of prepaid debit cards say they are offering an affordable alternative for the millions of unbanked and underbanked Americans. But consumer advocates warn that the industry needs more regulation, as some cardholders face hefty fee schedules to access prepaid debit.
The Convenience Of Prepaid
Consumers are drawn to the convenience of using prepaid debit cards, Terry Maher tells NPR's Audie Cornish. Maher is general counsel of the Network Branded Prepaid Card Association (NBPCA), an industry group, and has spent the past 25 years advising financial institutions on their prepaid card businesses.
Prepaid debit can be used anywhere the card's brand, such as Visa or MasterCard, is accepted.
"It's a lot safer than carrying cash … [and] the consumer can better budget and keep track of what they're spending," adds Maher.
Prepaid debit cards can also ease the worries of gift givers, allowing recipients to purchase their own gifts with the cards.
The Cost Of Prepaid
But the convenience of prepaid debit cards comes with a cost, says Adam Levitin, a law professor at Georgetown University who specializes in financial regulation.
"You don't have to worry about going over limit or overdraft fees, but there are plenty of other problems with prepaid debit cards," Levitin says.
Those problems come up because prepaid debit cards are largely unregulated, Levitin says, and as a result, some cards charge fees that can easily reduce the stored value even before the card is used.
Consumers often assume that the purchase price is the only cost of using a prepaid debit card, but some cards also charge activation fees, monthly maintenance fees, cash withdrawal fees, reloading fees and even inactivity fees.
Ripping Off Consumers?
A prepaid debit card launched by the Kardashian sisters of the cable TV show Keeping Up with the Kardashians was recently pulled off the market after receiving criticism for its fee schedule and its appeal to financially unsophisticated teenagers.
Levitin says the RushCard offered by hip-hop mogul Russell Simmons is another example of a prepaid debit card that charges high fees. Consumers can choose from four different RushCard designs, with purchase prices ranging from $3.95 to $14.95, and monthly plan users pay $9.95 each month in maintenance fees.
"[Simmons has] lent his name to this prepaid product, which he likes to market … that he's helping low- to moderate-income communities because it helps them avoid going to check-cashing outlets, which can be very expensive. But he's just replacing one form of expensive financial services for the poor with another, and it's hard to say which is really better," Levitin says.
A Solution For The Un- And Underbanked?
Maher says prepaid debit cards help meet the needs for the millions of unbanked and underbanked in the U.S.
"We're providing a solution to a community that otherwise would have a great difficulty in participating in everyday activities," Maher says.
At least 17 million unbanked adults do not have a checking or savings account, according to a 2009 survey by the Federal Deposit Insurance Corporation. The underbanked represent about 43 million adults who have a bank account but rely on alternative financial services such as check-cashing stores and payday loans.
As the cost of keeping low-balance checking accounts rises, prepaid debit cards provide a more affordable option for increasingly more consumers, Maher says.
Regulation Prospects
Regulation of the growing prepaid debit card industry will most likely come from the newly established Consumer Financial Protection Bureau, but don't expect it anytime soon, Levitin says.
In the meantime, Maher says competition between major card issuers will drive fee reduction for some prepaid debit cards.
Still, Levitin warns that consumers on the market for prepaid debit cards will have to be careful.
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Choosing The Card
1. Make a list of how you will use a prepaid debit card.
2. Read the fee schedule before you buy the card.
3. Compare the fees of different card options.
4. Check if the card charges different fees for choosing signature instead of PIN when paying.
5. Check if the card charges fees for selecting the "credit" instead of "debit" option when paying.
6. Consider a regular bank account instead. (To avoid overdraft fees, ask to opt out of "overdraft protection.")
Using The Card
7. Keep track of your balance to avoid facing fees for going over your card balance.
8. Sign up to receive written statements in the mail to keep track of your money.
9. Do not use prepaid cards to purchase gas at the pump, for hotels or rental cars. If you do, you may find you will not have access to more funds than the purchase and for a long period of time.
10. Do not rely on a prepaid card to build a credit record. Instead, consider getting a secured credit card with a credit line limited by a deposit, and limited fees.
Source: Consumers Union
AUDIE CORNISH, host:
This is ALL THINGS CONSIDERED from NPR News. I'm Audie Cornish. Guy Raz is away.
There's a holiday tradition that's taking a hit this year. People are backing away from their credit cards. After Black Friday weekend, financial industry watchers found that fewer than 20 percent of shoppers used credit cards to buy stocking stuffers - the lowest rate in nearly three decades.
Instead, there's a new kind of plastic on the rise: prepaid debit cards. And they could be the next big thing for a financial industry that's worried about losing billions in revenue as new Wall Street regulations take effect in the coming months.
You might recognize the pitch:
Unidentified Woman #1: Prepaid cards give you the power of plastic, but they allow you to manage your money in a way that's right for you. You are in complete control.
CORNISH: The cards are disposable and reloadable - kind of like a store gift card, except they can be used anywhere that takes credit. And unlike a standard debit card, they aren't attached to your bank account.
Americans loaded $28 billion onto these cards last year, double what they did in 2007. So our cover story today: the pitfalls of the new plastic. But first, two very different experiences with prepaid cards.
Mr. DENNIS BRISKIN(ph): My name is Dennis Briskin. I am 65 years old. I live in Palo Alto, California. My son was going to be in Spain for a month on a homestay as part of a Spanish language study, and we wanted him to have walking-around money. So we were investigating a prepaid debit card as a secure way for him to have access to money.
And we decided not to give him one of those cards, primarily because it seemed that the balance of the fees and convenience-slash-security was unfavorable to the consumer.
There was an initial cost of - I don't know, maybe 15 or $20 to get one of these cards. And then you would load up the card, and I believe there was a fee based on how much you were adding value to the card. And then if you allowed the card to go down to zero, there was a penalty charge to reload the card; there was an additional charge.
So if I wanted to give my son $1,500, it looked like after the fees, I was going to wind up giving him - I don't know, $1,350. It just seemed excessive. So we decided no, let's find a different way to do it.
Mr. JOEL TOGSTAD: Joel Togstad is my name. I am 28 years old, and I live here in Bend, Oregon. About five years ago or so, I was in a really bad car accident. And I had broken my back, and I didn't have any medical insurance, you know?
And so I started paying for all these outrageous medical bills and X-rays and specialists and whatnot with my credit card, which accumulated very quickly.
And it got to the point where, with all these fees and penalties, my monthly payments were so outrageous I couldn't afford to make them.
So when they started calling my family, and the creditors were bugging my family for cash that, you know, they didn't have and I didn't have - and finally, I cut all the ties with my banks because I just absolutely had it with these big banks. And actually, to this day, I still don't have a checking account.
And so then, you know, a couple of years down the road, I realized that you kind of have to have a card in this country to get by, I mean, with the hotels. And occasionally, I'll use it to pay my power bill or even like Netflix, small things like that.
So I went and got myself a prepaid card with Green Dot, which actually I've been, you know, fairly happy with.
So at the end of this whole ordeal, I got to chop up my credit cards and toss them all away. It was a great feeling.
CORNISH: Not everyone who's moving to a prepaid card is tossing that old plastic, but such debit cards are now the fastest growing of all electronic transactions. To find out why people are moving to reloadable, prepaid cards, I talked with Terry Maher, who spent the last 25 years advising financial institutions. He says one big reason for the switch is convenience.
Mr. TERRY MAHER (General Counsel, Network Branded Prepaid Card Association): The card is usable anywhere where the card brand - Visa, MasterCard, American Express, Discover - can be used. Second, it's a lot safer than carrying cash. Third, the consumer can better budget and keep track of what they're spending. And fourth, even giving the card to the recipient - if I tried to pick out clothing for my nieces, they would probably return it. But if I give them a branded gift card, they can go pick out what they want and which meets their needs, and they're extremely happy with it.
CORNISH: At the same time, over the last couple of weeks, you know, one of the big sort of kickers in the news was about the Kardashian card - you know, the card that was fronted by the - I don't know what you would call them, celebutantes, the Kardashian sisters...
Mr. MAHER: Yeah. I wanted to get one of those cards, yeah.
(Soundbite of laughter)
CORNISH: ...who were helping to promote a sort of prepaid debit card, and who faced a lot of backlash because of the criticism of the amount of fees on the card.
Mr. MAHER: Yes.
CORNISH: And there's been a lot of highlighting of the fee structure, of the way these cards work. Is this a step back?
Mr. MAHER: Well, I think there's two things. One, the Kardashian card was an outlier. You know, if my kids were younger and they had requested the card, I would say no.
There's a whole lot of other cards out there - the Green Dot card, the Capital One card, PreCash - which can be used at very, very low cost.
CORNISH: But the concern of consumer groups has been that it wasn't an outlier, that it might actually be a signal of what's to come. It seems as though this is a new marketplace for banks to make money.
Mr. MAHER: Well, I guess you have to look at it: in comparison to what? The most expensive is to be unbanked - for the consumer to have to get their paycheck, go to a check-casher, pay 2 to 3 percent to the check-casher to cash their check, then to buy money orders to pay their bills, and then the safety - unsafeness of carrying around cash.
We have studies that show that compared to a person who doesn't have a bank account or a person who even has a low-balance checking account - which, you know, are not free anymore - that the prepaid card fees, over the year, average about 100 to $150 per year. That's much less than what an unbanked consumer would pay for the check-cashing and for the money orders and etc., or what a consumer would pay for a low-balance checking account today.
CORNISH: So I mean, in a way, that's sort of a tough choice. It's like if you want to be a part of the current economy, which is more and more card-based, this is the new basic option, you're saying.
Mr. MAHER: This is the solution. We're providing a solution to a community that otherwise would have a great difficulty in participating in everyday activities.
CORNISH: That's Terry Maher, general counsel for the Network Branded Prepaid Card Association, and partner with Baird Holm LLP in Omaha, Nebraska.
Mr. Maher, thank you.
Mr. MAHER: Thank you very much.
CORNISH: Credit card companies bounced more than 8 million people from their rolls last year, according to credit reporting agencies. And while reloadable cards may be convenient, are they the solution? Not so much, says Adam Levitin. He's a law professor at Georgetown who specializes in financial regulation.
Professor ADAM LEVITIN (Law, Georgetown University): There are plenty of other problems with prepaid debit cards, and these problems come up because prepaid debit cards are virtually unregulated.
There are a few major issues with them. First and foremost are simply the number and amount of fees. These fees can easily eat up most of the value stored on a card.
In preparation for talking with you, I just went and looked at a couple of cards, and I started making a list of the types - or the numbers of fees they have, and the types.
So you've got fees to buy the cards: activation fees; monthly charges or maintenance fees; cash withdrawal fees, those are for using an ATM; balance inquiry fees, they charge you to find out how much money you have on the card; convenience fees, that's if you use your PIN number for a transaction rather than a signature; reloading fees; inactivity fees; dormancy fees; there are expiration dates, and if it expires, you lose whatever money's on the card; plan-change fees; cancellation fees - I love that one; and then, you know, all sorts of fees for doing things like getting paper statements, currency conversion, so forth.
CORNISH: So what's left on the card?
Prof. LEVITIN: That's the question. That's really the problem.
(Soundbite of laughter)
Prof. LEVITIN: So we had - recently the Kardashian card, it's estimated that the fees for using it for a year would be almost $100. Similarly, Consumers Union estimates that Russell Simmons' RushCard, in the first month, it could cost a consumer more than $43 in fees.
CORNISH: Right, Russell Simmons is the famous rap mogul and...
Prof. LEVITIN: That's right. He lent his name to this prepaid product, which he likes to market as a - you know, that he's helping low- to moderate-income communities because it helps them avoid going to check-cashing outlets, which can be very expensive.
But he's just replacing one expensive form of financial services for the poor with another, and it's hard to say which is really better.
CORNISH: So did the Dodd-Frank legislation - and this is the Wall Street reform legislation that passed earlier this year - did it leave a loophole? Or is this - the growth of an industry like this - a test, its first test of the regulation?
Prof. LEVITIN: Dodd-Frank didn't touch prepaid debit cards. The only provision in Dodd-Frank that touched debit cards in general related to the fees that merchants pay for accepting those cards.
CORNISH: But was it supposed to? I mean, wasn't the legislation actually just supposed to make a framework for now - this future consumer agency to jump in?
Prof. LEVITIN: That's correct. So Dodd-Frank did create the Bureau of Consumer Financial Protection. And that is, if we see future regulation of prepaid debit cards, it will be through the Bureau of Consumer Financial Protection.
CORNISH: Any hints that that's going to happen? And I ask because I get the sense that banks, while there's a growth of this particular industry, they're not exactly running to it. I mean, there seems to be some hesitation.
Prof. LEVITIN: It's likely that in the future, we will see regulation of this industry. I wouldn't expect it within the next year, if only because it's going to be quite a while before this new agency is really fully operational.
CORNISH: But in the meantime, what do we do?
Prof. LEVITIN: In the meantime, consumers have to be careful. That's, unfortunately, the answer.
CORNISH: That's Adam Levitin, law professor at Georgetown University. He also writes a blog on credit, finance and bankruptcy, called "Credit Slips."
Adam, thank you so much.
Prof. LEVITIN: Thank you. Transcript provided by NPR, Copyright National Public Radio.
