Prepaid cards – pitfalls and profit?
By Consumers Union on Tuesday, December 18th, 2007
A new study issued December 14, 2007 by financial industry consulting group says that there 36 million people in the US who could start carrying a prepaid spending card. The group, Celnet, estimates a future market of $31 to up $192 billion in value to be held on these cards. You can read a bit about this study at: http://www.celent.com/PressReleases/20071214/NonbankPrepaid.htm.
The industry jargon for these cards is “branded prepaid card.” One consumer advocate has called it: “The bank account in your pocket.” This portable money can cost consumers in fees and have uncertain protections if someone else misuses the card number. On the issue of fees, an excellent annual gift card study by the Montgomery County Department of Consumer Affairs contains a section on general purpose cards issued by banks as gift cards. http://www.montgomerycountymd.gov/content/ocp/giftcards2007final.pdf. That study found all of these fees: monthly fees ranging from $1.25 after six months to $4.95 after one year, with one card charging $25 per six months after the first six months, expiration dates of six months to three years, and card replacement fees of $5 to $15.
The basic idea of the general spending card is that the consumer turns over cash, makes a deposit, or arranges for a paycheck to be deposited to the card, and then uses the card like a debit card tied to a bank account. Fee structures for general spending cards can include an annual or monthly fee, deposit fees (called a load fee), fees to use the card at an ATM, and a variety of other fees. If the ATM network associated with the card is small or inconvenient, there may also be ATM surcharges. Some of these cards allow overdrafts, with high overdraft fees similar to the fees that sometimes drive consumers out of a traditional bank account. A February 2007 study by the Center on Financial Services Innovation on prepaid cards described these ranges of fees as typical of the companies it studied: $ 9.95 to $14.95 to purchase and activate, $2.95 to $5.00 to reload funds, often waived if by direct deposit, $4.95 to $7.95 monthly, $1 to $2 per ATM withdrawal, and $1 to $3 for live customer service. www.cfsinnovation.com/document/general_spending_prepaid_cards.pdf. Not every card charged each of these fees, and there have been some new products introduced with other fee ranges since this report was issued. .
Bank accounts aren’t always consumer-friendly in the fees area, but at least consumers with a bank account have the clear protection of a federal law, the Electronic Funds Transfer Act (EFTA), and a regulation, Regulation E, that requires the bank to give the money within ten business days after an unauthorized transaction. Consumers Union thinks that it is long past time for federal law to be amended to clearly provide the same protection for every type of card that works like a debit card, whether or not it is tied to a bank account, especially if the card is designed to hold money enough to work like, or replace, a bank account, such as cards that can hold more than $250. The Federal Reserve Board has provided debit card consumer protection for payroll cards arranged by employers for recurring deposits. That important special protection for payroll cards doesn’t apply to a general spending card selected by the individual even if that card receives a direct deposit of the paycheck. For more on payroll cards, see: http://www.consumersunion.org/pub/core_financial_services/000920.html. Whether the general rules that cover bank accounts also protect the funds deposited for a general spending card depends on the very murky legal question of whether the deposit creates an “account.”
Even members of the industry told the Federal Reserve Board in 2004 that there is: “a lack of clear and consistent federal or state legal and regulatory requirements for prepaid products.” http://www.federalreserve.gov/paymentsystems/storedvalue/. Consumers Union and ten other consumer groups, including the Consumer Federation of America, Consumer Action, and U.S. PIRG, asked the Federal Reserve Board in February of 2006 to open a new rulemaking going beyond the work it was doing on payroll cards: “to apply and clarify coverage of the Electronic Fund Transfer Act and Regulation E for to other types of stored value cards which hold important household funds, such as emergency benefit payments, income tax refunds, or loan proceeds, and to card marketed or used as account substitutes.” http://www.consumersunion.org/pdf/inter-payroll.pdf.
Consumers are still waiting for the Federal Reserve Board to clarify basic consumer protections, such as the right to get stolen money back, on a prepaid general spending card. The new Celnet report on the growth of these cards illustrates the continuing need for the Federal Reserve Board to act to ensure that these general spending cards, which increasingly will compete with bank accounts, don’t have second class consumer protections.