A new Consumer Reports analysis of prepaid cards has found that industry competition is beginning to help bring down fees, but fees aren’t always disclosed up front and can still add up quickly. Moreover, prepaid cards also offer weaker consumer protections than those provided by traditional debit cards.
Prepaid cards are reloadable cards that can be used to make payments similar to debit cards and are becoming the foundation of a second-tier banking system. Prepaid cards look like other plastic payment cards and bear the network logos of Visa, MasterCard or Discover along with the word “debit” on the front of the card. The Federal Reserve has found that prepaid cards are the fastest growing non-cash method of payment. That growth is expected to continue as the prepaid card industry works to attract the business of the estimated 60 million adults with limited or no access to bank accounts.
Consumers Union, the policy and advocacy arm of Consumer Reports, is urging the Consumer Financial Protection Bureau to require prepaid card issuers to improve fee disclosure and abide by the same mandatory protections consumers are guaranteed by law when using debit cards linked to their bank accounts.
“Now that so many households are relying on prepaid cards to manage their finances, it’s time for the Consumer Financial Protection Bureau to take action to protect consumers,” said Michelle Jun, senior attorney for Consumers Union. “We need new rules that require fees to be disclosed in a simple format so consumers know the costs before they purchase a card. Prepaid cards should get the same strong protections as debit cards so consumers have the peace of mind that their money is safe if their card is lost or stolen.”
Consumers can typically only find information about a few of the fees charged by card issuers before they purchase a card at a store. While some prepaid card issuers are providing direct links to fee schedules on their web sites, others make finding this information more difficult. Consumer Reports examined 16 different prepaid cards and found that issuers charged a variety of different fees to consumers:
Fees to Activate Your Card: 9 of the 16 prepaid cards reviewed charged consumers a fee to activate their card. Activation fees ranged from a low of $3 for the Walmart Money Card, nFinanSe card, and the Approved Card to $14.95 for some select RushCards. Some prepaid card issuers like NetSpend and Western Union are no longer charging activation fees.
Monthly Fees: 13 of the 16 prepaid cards charge monthly fees, ranging from $2.95 for the nFinanSe card to $9.95 for the Vision Premier card and the Univision card. Some prepaid cards, like the Bank Freedom card, will waive the monthly fee if the consumer makes a minimum deposit each month. Some cards, like the RushCard, give consumers the option of choosing the monthly fee plan or a per transaction fee plan.
Fees to Get Cash: 14 of the 16 prepaid cards examined charged a fee to withdraw cash from a domestic ATM, ranging from $2 to $2.50. This does not include the additional charge imposed by ATM operators. Consumers using Green Dot and Univision prepaid cards can get free access to Allpoint network ATMs, located in numerous retail locations. Otherwise they pay a fee to use a non-network ATM
Fees to Find Out Your Balance: 12 of the 16 prepaid cards impose a fee for checking balances at ATMs, ranging from 45 cents to $1 per balance inquiry. The ATM operator may charge an additional fee. Many prepaid card issuers provide other methods to check balances for free, such as by email, text message, or phone.
Fees to Get a Paper Statement: A number of prepaid cards no longer provide information about the availability of paper statements in their card agreements. Seven of the prepaid cards charge customers a fee to get a monthly paper statement detailing their transactions. Paper statement fees ranged from $1 for the Rush Card to $5.95 for the NetSpend Visa card. Many of the prepaid cards provide free access to monthly statements online or through email or text alerts.
Fees For Customer Service: Some prepaid cards enable all consumers to speak to a customer service representative for free. Other prepaid cards provide free customer service if the customer sets up direct deposit or only makes a limited number of calls per month. A few prepaid cards charge customers each time they make a call to customer service, ranging 50 cents per call for the NetSpend Visa card to $2.99 per call for the UPSide card.
Fees for Inactivity: 5 of the 16 cards charged fees when cards are not used after a certain period of time. These dormancy fees range from $2.50 per month for the H&R Block Emerald Card (after three months of inactivity) and the Western Union MoneyWise card (after 13 months) to $5.95 per month for the NetSpend Visa card (after 90 days of inactivity).
Prepaid card users can avoid some fees by taking a few steps. First, look online for the card’s fee schedule to find out all the different ways you can be charged. Your costs will vary widely depending on which card you get and how you use it. Make sure you understand those costs before selecting a card. If you decide to get a prepaid card, you may be able to reduce your fees by using direct deposit to load money onto your card. Avoid non-network ATM charges by getting cash back when making purchases and checking your balance online or over the phone.
Prepaid card users could end up losing money if their cards are lost or stolen and used to make fraudulent purchases. That’s because they are not protected by the same regulatory and statutory safeguards that enable debit card users to recover their money. If a debit card user contacts a bank about a lost or stolen card within two business days, liability is limited up to $50 (or up to $500 if the consumer makes the report after two business days). Prepaid card users are not guaranteed these protections since the contract terms could be revised or rescinded at any time.
In addition, prepaid card users may not have the same FDIC guarantee as bank account holders that they’ll be able to recover all of their money in the event of a bank failure. Even if the prepaid card web site displays the familiar FDIC logo, it’s not always clear whether the cardholder will be able to recover the full amount on the card or a portion shared with other prepaid cardholders.
Many prepaid cards are now offering new features to enable consumers to establish credit files or help those with bad credit to rebuild their credit record. But Consumer Reports found that information from prepaid card transactions is not useful to help a consumer build a credit record. Some prepaid cards also offer small lines of credit, which must be repaid within a short period of time. These short term loans are expensive and must be repaid quickly much like a payday loan.
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