* 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 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
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,"
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
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
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.