The end of free checking is giving a boost to prepaid debit cards.
The reloadable cards have been one of the fastest growing products in the banking industry for years as low-income consumers in particular have sought to avoid hidden bank fees and overdraft charges. Now more than 30 million Americans use prepaid debit cards, according to a survey by the National Foundation for Consumer Credit Counseling.
Last year, some $300 billion plus was put on prepaid cards, said Adam Rust, research director with Reinvestment Partners, a Durham consumer advocacy group. That’s up from $30 billion in 2006.
But the cards come with their own fees and can end up costing more than a traditional checking account, according to separate reviews from Consumer Reports and Bankrate.com.
Because the industry is still young it has not undergone regulatory scrutiny like the credit card industry. But now the Consumer Financial Protection Bureau is looking into how to supervise the cards, hoping to come up with a standard.
The bureau is holding a hearing about the cards in Durham on Wednesday. CFPB director Richard Cordray will speak, but the emphasis will be on hearing from consumers, consumer advocates and industry groups.
Among those offering comments will be Martin Eakes with the Center for Responsible Lending and Peter Skillern with Reinvestment Partners, as well as representatives from the Network Branded Prepaid Card Association. The industry, hoping to get ahead of any regulation that it says will make the cards more expensive, has come up with its own voluntary disclosure standard.
Regulations debated
Rust calls the industry standard “weak.” Reinvestment Partners has come up with its own recommendations, including eight principles for reform that include a one-page disclosure form that breaks out the costs of the cards for light users, average users and everyday users. It wants to highlight the risks of using the cards, including inactivity fees and out-of-network ATM fees.
It also recommends that each card have a QR code that consumers can scan with their smartphone in the store, which would take potential buyers to a website listing the scale of fees.
“Most low-income people don’t have a computer, or a landline,” Rust said. But they are likely to use a smartphone. The QR code could make a huge difference, he said, because it can overcome one of the biggest problems consumers can have with prepaid debit cards: the ability to comparison shop.
He said that prepaid cards have no standard set of fees and that many have myriad “if then” charges. If you have direct deposit then the fee is $5. If not, then the fee is $9.95.
“With Green Dot if you can make 30 transactions in a month, then the fee is waived,” he said. “Others don’t have that. Some will charge $1 if you use a PIN but nothing if you sign at the point of purchase.”
Green Dot is one of the largest prepaid card companies. Others include NetSpend, AccountNow and RushCard. The cards come emblazoned with either Visa, MasterCard of Discover logos and those companies get as much as 20 cents a swipe. Banks such as Chase also offer pre-paid cards.
Popular with students
American Express offers a card that Rust finds particularly concerning. Unlike others, when you put your money onto the AmEx prepaid, your cash doesn’t go into a bank, Rust says, but rather in the American Express Travel Corp. “You’ve just got to trust us,” is the idea, Rust says. “We all know what happened to AIG, a ‘rock solid company.’ ”
Rust and other consumer advocates say they are not trying to regulate the cards out of existence, realizing that they are useful for people who are trying to live within their means. They are also becoming popular with students who don’t want to carry large sums of cash and people who use them for online shopping.
Eve Morin of Spring Lake banks with Wells Fargo but still likes to use prepaid debit cards. “I don’t bother with checks at all. They drive me up the wall,” she said.
Morin, who is in school to learn medical billing and coding, agrees the cards can be complicated but says it’s simply a matter of paying attention, using the right ATMs that correspond with the card and using little tricks to avoid extra fees like getting cash back with a purchase when there’s not a no-fee ATM nearby.
“You put whatever you know you can spend on them and that’s all. … That way you don’t go over budget,” she said. “… I have one for my son. He’s 15. He earns his allowance and it goes on the card.”
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