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Pew: Prepaid Cards Work But Carry Risks

We’ve looked at lots of prepaid debit cards over the past year and noted that fees on these cards vary — from the blatant rip-offs like the RushCard to the much more reasonably priced cards offered by AARP and American Express, some of which carry few if any fees if you use them right.

Prepaid cards allow you to load money onto the card and then use them to make purchases, withdraw money from ATMs and pay bills. The cards come branded by Visa, MasterCard or American Express, and can be used wherever those cards are accepted.

More people are using them as an alternative to credit cards in order to avoid overspending or because they don’t have good enough credit to get a traditional credit card.

However, many consumers also are using them as an alternative to bank checking accounts in order to avoid monthly service fees and overdraft fees.

A new report by the Pew Charitable Trusts says these cards “may work for some consumers who frequently incur high bank overdraft fees.”

Prepaid cards “could provide a valuable and needed substitute for consumers who are unable or unwilling to maintain traditional checking accounts,” Pew says. “While the fees for everyday services are generally higher for prepaid cards than for checking accounts, the trade-off for a product that does not allow overspending may be beneficial to many consumers.”

However, it notes, prepaid cards do come with added risks.

“The prepaid card market is an evolving industry that has inconsistent fee structures and services, which are confusing to customers,” said Susan Weinstock, director of Pew’s Safe Checking project. “Consumer protections are needed to ensure that people are not misinformed and can comparison shop among products, including traditional checking accounts.”

The biggest problem, Pew says, is that prepaid cards are “largely unregulated” and not covered by laws requiring disclosure of fees and terms or those that limit consumer liability for unauthorized electronic fund transfers.

“The unsupervised and unregulated status of the prepaid card market creates many concerns about the terms, conditions and fees that commonly accompany these cards,” Pew says.

According to Pew, the industry is expected to grow from less than $30 billion in assets in 2009 to more than $200 billion next year, an increase of more than 500%.

The 39-page report looked at 52 cards that accounted for about three-quarters of the prepaid market in 2011.

Its main findings:

  • The varying fee structures and disclosures for individual cards make comparison shopping very difficult. Most products carry anywhere from seven to 15 individual fees, and their disclosures are not uniform.
  • The median cost of the most common fees Pew tracked, such as monthly and ATM fees, ranged from 50 cents to $9.95.
  • Although some prepaid issuers claim customer funds are covered by FDIC insurance, these companies are not federally supervised and there is no guarantee that these protections are executed properly.

The Consumer Financial Protection Bureau is expected to issue proposed regulations covering the industry in the near future.

Pew recommends that the CFPB be given the authority to regulate prepaid card issuers to prevent unfair, deceptive or abusive acts or practices, and to require issuers to make clear and uniform disclosures, as well as to ensure that FDIC pass-through insurance procedures are followed.

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