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.
“We’re still learning,” Morrison said.
Already, the big bank newcomers are changing the prepaid game — and some say for the better.
Big banks are helping drive down prepaid costs because they have plenty of other ways to make money and can offer the cards more cheaply, industry pros and consultants say. Nerdwallet.com, which ranks prepaid cards by an annual total of the most common fees, has the U.S. Bank Convenient Cash Card at No. 1. with fees of $39. In last place is the ReadyDebit Platinum card, which smacks holders with $420 in fees.
Even just a year ag, consumers weren’t doing much cost comparison with prepaid cards, and prepaid issuers knew that, said Anisha Sekar, NerdWallet’s vice president of credit and debit products. The new card issuers are marketing themselves as affordable.
“That’s really shifted the dialogue,” Sekar said.
One feature that consumers should have front and center, she said, is whether a prepaid card offers free access to an ATM network. Without it, card holders will get hit by an ATM surcharge every time they use one.
Whether or not card issuers adequately disclose such fees is an issue the Consumer Financial Protection Bureau (CFPB) is examining. It’s also looking at what protections are offered for lost or stolen cards, whether money loaded onto cards is insured by the Federal Deposit Insurance Corp. and overdraft features, among other things.
NerdWallet ranks 59 cards, but there are more than that and the proliferation of terms and features can be bewildering. The arrival of the big banks has only added to the confusion, said Papadimitriou at CardHub.com.
He said the CFPB should focus on limiting the number of fees that card issuers can charge, and standardizing the names of the fees so consumers can comparison shop.
Some consumer advocates also want the CFPB to ban overdraft fees and any other potential credit features, saying prepaid cards should remain prepaid in order to be a safe alternative to bank accounts.
Tracy Fischman, executive director of AccountAbility Minnesota, said her organization worked hard to find a safe, affordable card for its clients. The group provides free tax assistance to low-income people, as well as savings accounts, and it started offering prepaid cards for tax refunds two years ago because clients were asking for them.
Her group now works with U.S. Bank to offer AccelaPay, a prepaid card used by many employers for payroll that Fischman’s clients can use for their tax refund, and continue using afterward. Last year 490 customers deposited their refunds on the cards. They can also put their paychecks onto the card for free.
One wrinkle: Cardholders report being charged $2 to $5 to load more money onto the cards. But overall, the response has been good, she said.
Melisa Pertile, of Minneapolis, said she just got one of the cards through AccountAbility Minnesota, which did her taxes for free. She said she expects it to make her life easier.
Until last year when she got a prepaid card through H&R Block, she had been operating on a cash-only basis. Check-cashing places charge $5 to cash paychecks, she said, and she drove around to pay bills in person.
“Who knows where that would be,” she said. “When you’re a single parent it’s kind of hard. Every little bit counts.”
Fischman, at AccountAbility, said she was originally skeptical of the cards because of the lack of regulation, but she now sees them as a tool to help people be financially secure and build assets.
“We believe that these cards do not substitute access to the financial mainstream, but they are far better than cash alone,” Fischman said. “The bottom line is we need to really work with people to meet their needs where they are.”