Prepaid debit cards should be more heavily regulated -study

Wed Sep 5, 2012 4:59pm EDT

* Prepaid cards are alternative to checking accounts

* Many cards lack basic protections, Pew study finds

* Cost of cards depends on use, choice of issuer

By David Henry

Sept 5 (Reuters) - Prepaid debit cards, which are popular with consumers who are too poor for checking accounts, are too lightly regulated and should face more restrictions, according to a study released by Pew Charitable Trusts released on Wednesday.

Prepaid debit cards have become popular now that many banks have jacked up fees for checking-account consumers with low balances. Major consumer banks like JPMorgan Chase & Co and USBancorp have recently begun offering the cards.

Some prepaid cards, however, lack basic consumer protections, such as limits on loss due to theft, and their fees are often poorly disclosed, researchers at the Pew Charitable Trusts found after studying 52 different cards.

"Protections that apply to a checking account do not necessarily apply to prepaid cards," said Susan Weinstock, director of Pew's Safe Checking project.

The U.S. Consumer Financial Protection Bureau is looking to boost protections for the cards.

"We'd like to see the CFPB adopt rules covering consumer protection gaps and uniform disclosures as soon as possible," Weinstock said.

The report did find that some consumers are better off with prepaid cards. For "inexperienced" consumers who incur bank fees and overdraw their accounts, the median monthly cost for prepaid cards would be $28.70, compared with $94 for checking accounts.

For "savvy" consumers who try to avoid fees and overdrafts, the median cost for prepaid cards would be $4.50, compared with $3.99 for use of a checking account.

The study found that different card issuers disclose as many as 24 different fees and as few as only one. Most prepaid cards carry between seven and 15 fees. For example, the median initial fee to get a card was $9.95, the median monthly fee was $5.95, and the median fee to withdraw cash from automated teller machines was $2.25.

Unlike with checking accounts that can result in huge overdraft fees, prepaid card holders generally cannot spend more than the amount loaded onto their cards, a feature that is attractive to many who find the cards help them live within their means.

But Pew found that five of the 52 cards studied provide for overdraft plans and fees, and more cards could do so in the future. That could be a problem for users who have funds automatically added to their cards, such as through payroll deposits. "Prepaid cardholders, due to lack of regulation, can be automatically enrolled without their knowledge into overdraft coverage," the study found.

The U.S. Consumer Financial Protection Bureau asked in May for public comment on fees for prepaid cards and protections against fraud. The agency said it planned to issue rules for the industry but has yet to propose any. [ID: nL1E8GMGKI]

Pew posted its study on its website at

Pre-paid cards previously were marketed almost exclusively by specialty companies, such as Green Dot Corp, NetSpend Holdings Inc and Meta Financial Group .

While money put on cards can be covered by federal deposit insurance against financial failure by the issuer, it is not clear that the coverage is always in place for cards from companies that are not supervised by federal regulators, Pew said.

Though the industry has recently clarified the fees and terms it charges, the disclosures are not consistent, which makes comparison shopping difficult, Pew said.

Prepaid cards give banks a way around rules linked to a provision of the Dodd-Frank financial regulatory reforms known as the Durbin amendment, which limits fees charged to merchants for processing conventional checking about debit cards to about 0.25 percent of the transaction value.

The debit card limits do not apply to prepaid cards, which typically charge merchants about 1.70 percent.

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