Report Says Regulations Crucial for Prepaid Debit Cards

(Pittsburgh Post-Gazette/MCT) -

Prepaid debit cards are becoming more affordable with increased competition resulting in fewer fees, but the booming market still lacks critical consumer protections, according to a new study by The Pew Charitable Trusts.

U.S. consumers loaded some $64 billion onto prepaid debit cards in 2012, more than double the amount in 2009, Pew said. The cards are available at many checkout counters and at a number of big banks.

The new report, “Consumers Continue to Load Up on Prepaid Cards,” looked at changes since the Washington, D.C.-based nonprofit research group released its first study on the topic two years ago.

The reloadable cards — designed mainly for consumers who don’t have bank accounts — can be used wherever traditional debit cards are accepted: at the register, to make purchases online or to withdraw cash at ATMs. Many people use them while traveling instead of carrying cash and as a budgeting tool to limit how much they or their children spend.

As the cards have zoomed in popularity, issuers have been criticized for blindsiding users with a bevy of fees. Costs vary but can include activation fees and monthly fees, plus ATM, transaction, reload, balance inquiry, statement and dormancy fees, among others.

Although the industry has improved, it remains largely unregulated. That gives consumers few protections from faulty disclosures and leaves it up to the issuer whether to cover losses from fraudulent transactions, Pew said.

“While prepaid cards offer many benefits to consumers, they are a relatively new product with little oversight,” said Susan Weinstock, director of Pew’s safe checking project. “A lack of protections undermines prepaid cards as a safe and easy way to manage money.”

One of the chief problems, the report found, is that prepaid cards are not covered by the federal laws that protect holders of traditional debit cards tied to checking accounts from loss of funds and liability for unauthorized transactions.

Most prepaid card issuers offer some protections but the coverage is voluntary, can include loopholes and can be revoked without notice, Weinstock said during a conference call with reporters Thursday.

Another problem is that prepaid card disclosures involving fees and terms often are incomplete, hard to understand and hard to find, she said.

The federal Consumer Financial Protection Bureau is set to release proposed rules for regulating the prepaid debit card industry by May, she said.

At the time of Pew’s first report in September 2012, the prepaid market was almost exclusively the domain of nonbank issuers such as Green Dot Corp., NetSpend, H&R Block and AccountNow. The latest report found 10 big banks were offering prepaid cards, although they still accounted for a small portion of the overall market.

Notably, Pew found that prepaid cards offered by major banks were significantly cheaper than nonbank cards because they were subject to fewer fees, Weinstock said. Often they were a better deal than getting a checking account from the same bank.

Pew laid out a number of policy recommendations for making prepaid cards better for consumers, including mandating protections against liability for unauthorized transactions; requiring that funds be federally insured in the event of a bank failure; mandating uniform, easy-to-understand disclosures, and prohibiting issuers from allowing overdrafts and assessing overdraft fees.