The cards are increasingly popular, but the regulations are few and the fees confusing.
An exploding market for prepaid plastic cards is bringing new convenience to consumers but raising concerns that the largely unregulated products could put people at risk with big fees and inadequate protections.
Dollars loaded onto prepaid debit cards will double to $106 billion by 2016, according to research and consulting firm Aite Group, not including the growing number of payroll cards used by employers such as McDonald’s and Wal-Mart. There are already scores of options, many with colorful names such as BlueBird, Liquid, Mango and Yap.
But while prepaid cards are often used as a substitute for a bedrock checking account, they come with far fewer rules to guard against things like hidden fees. Most prepaid cards charge between seven and 15 individual fees, according to a study by Pew Charitable Trusts, including fees for live customer service or loading more money.
The concerns have attracted the attention of the Consumer Financial Protection Bureau, which is planning to issue new rules.
“It’s like the Wild West in terms of the different fees and policies,” said Odysseas Papadimitriou, CEO of CardHub.com. “The card issuers have a million different fees and everyone calls it something else. Consumers are completely confused about them.”
Even the nation’s banking giants have jumped into the game. In the past two years many of the top commercial banks have introduced consumer prepaid cards, including JPMorgan Chase & Co., Wells Fargo & Co. and Minneapolis-based U.S. Bancorp, which was already big in payroll cards.
Madeline Aufseeser, a senior analyst at Aite Group, calls it “the last mile driving toward the cashless society.” Prepaid cards, once considered a fringe product, are now a mass market phenomenon, she said.
With checking less profitable for them, big banks are working to recoup revenue lost from new restrictions on what they can collect on checking account overdrafts and in debit card swipe fees.
They’re also eager to capture some of the 30 million or more U.S. households that are unbanked or underbanked, a segment that has swelled since the Great Recession and represents more than $1 trillion in wages. Regulators have encouraged them to reach out to underserved populations.
Bertrand Sosa, co-founder of Mango Financial Inc. in Austin, Texas, calls prepaid a new form of à la carte banking, on people’s terms.
“I think in banking that really hasn’t been done before,” Sosa said. “I don’t think we’ve even scratched the surface in what prepaid is going to do to the financial service system.”
Amaris Phillips-Bynum just knows the cards are convenient. The St. Paul resident, who works in insurance claims, ditched her bank checking account a few years ago over fees in favor of a prepaid card. She has a savings account at a credit union and a savings account at Mango Financial that she said earns a high 6 percent interest.
Her paycheck is automatically deposited, part to her savings account and part to her Mango card, her go-to card for daily expenses such as groceries and gas.
“I have it hooked up with my daughter online to pay her lunch money,” Phillips-Bynum said. “The only gripe that I have with gas is that the card doesn’t work at the pump.”
U.S. Bank said it is getting into prepaid cards to provide options for people who haven’t banked there in the past, as well as for current customers.
So far the bank has mainly marketed the card in branches, but it is also piloting two studies and marketing campaigns in Duluth and St. Louis. It’s also marketing its prepaid “Contour Campus Card” to colleges and universities.
The lender is still researching who uses the cards and how, said Kevin Morrison, senior vice president of U.S. Bank Retail Payment Solutions. More than half of those who have taken its new prepaid card already bank at U.S. Bank, Morrison said, and people are using it in ways the bank hadn’t necessarily expected, such as for the nanny to use, for travel or to give to elderly parents.