With the market for prepaid debit cards experiencing explosive growth, providers are finding no shortage of new customers. But those customers are entering a market that's largely unregulated and can pose serious financial risks, according to a new study.
The study, conducted by researchers at the Pew Charitable Trusts' Safe Checking in the Electronic Age Project, took a comprehensive look at the terms of conditions of 52 general-purpose reloadable prepaid, or GPR, cards.
Here are some of their findings:
- The varying fee structures and disclosures for prepaid cards make comparison shopping very difficult because most products have seven to 15 individual fees to consider, and their disclosures are not uniform.
- The cost of prepaid cards can be less than checking accounts, but the cards come with significant risks. These products are not covered by laws requiring disclosure of fees and terms. They also aren't covered by those laws that limit consumer liability for unauthorized electronic fund transfers.
- Most consumers use prepaid debit cards as a way to keep spending within their means; overdraft options run counter to this goal and should not be offered.
- Insurance from the Federal Deposit Insurance Corp. does not necessarily apply to funds loaded onto GPR prepaid cards. Those companies that claim funds are FDIC-insured are not federally supervised. Therefore, there is no guarantee the protections are executed correctly.
These conclusions jibe with a lot of the findings from our prepaid debit card study earlier this year. Generally, prepaid cards offer customers a simple proposition. You can transact via a debit card without a checking account and the attendant risk of cascading overdraft fees. In return, you'll pay lots of small fees for day-to-day transactions.
That's an appealing proposition for a lot of people who've been burned by or locked out of checking accounts over the last few years, and the prepaid card industry has grown rapidly as a result. From the study:
They are a burgeoning product. In 2009, consumers loaded $28.6 billion onto these cards and by 2013, that figure is expected to reach $201.9 billion.
That amounts to an increase of more than 600 percent over a period of four years -- a veritable gold rush for prepaid debit card providers. The problem is, as with any gold rush, things can get a little disorderly. The barriers to entry for someone who wants to get into the industry are very low. Basically anyone with a few bucks can sign a deal with MetaBank or Bancorp, and can introduce a new, branded prepaid card in a few months. That's why you're always seeing a new card coming out endorsed by this or that celebrity or targeted at this or that particular niche.
The result of that is a crowded marketplace full of products with very different terms and conditions, some of which are fair and even consumer-friendly, and some that are just awful for consumers.
And that marketplace is made even wilder by the lack of regulatory supervision. As Pew researchers noted, there aren't any rules requiring prepaid card providers to accurately and comprehensively disclose fees. The Electronic Funds Transfer Act, which helps shield consumers from taking the full hit from debit card fraud, doesn't apply to general purpose reloadable prepaid cards, Susan Weinstock, project director for Pew's Safe Checking in the Electronic Age Project, said yesterday in a conference call.
Weinstock said that while some prepaid card companies write fraud protections into their contracts, there's no government mandate to do so. So if your card is lost and used by someone else or a hacker gets a hold of your card number and drains your account, there's a chance you'd be out the entire balance of the card, and possibly more if the card has overdraft options.
Another source of danger noted in the study was bank failures. FDIC protection only applies to funds tied to a specific individual by name. If the prepaid card company doesn't put your name on your funds and the bank holding those funds fails, you'd likely be out of luck, Weinstock said.
These are serious issues!
Now, it's true that the Consumer Financial Protection Bureau is in the beginning stages of a rule-making process that may one day address some of these problems. Until they do, many prepaid card holders are going to be walking around with cards loaded with hundreds or thousands of dollars they can ill afford to lose, with none of the protections that they probably assume are built in.
I think there's a role for prepaid cards to play in the financial lives of Americans. The open-ended overdraft risk of checking accounts just doesn't work for some people, and prepaid cards can serve a number of functions, even for people who already have a checking account.
But in a world where people are loading their entire paychecks onto these things and using them as their primary transaction account, uniformity of disclosure, fraud protection and backstops against bank failure are musts.
What do you think? Do regulators need to rein in prepaid cards? If you use a prepaid debit card, what's been your experience?
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