It's rare that the banking industry gets lauded for bringing relief to U.S. consumers.
But a new report from the Pew Charitable Trusts finds that Americans paid less to use general-purpose prepaid cards in 2013 than they did a year earlier, with banks leading the way to lower prices.
Consumers who purchased their prepaid cards from a bank saved an average of $5-$14 a month over those who bought them from nonbanks, the research shows. The savings were larger for less savvy consumers.
The findings are part of a 62-page report that includes some of the most comprehensive data published in recent years about the fast-growing prepaid card market. The report is partly a market overview, partly a survey of customers' attitudes and partly an advocacy document, as Pew looks to influence prepaid card regulations that are expected from the Consumer Financial Protection Bureau in the spring.
On Pew's list of recommendations for the CFPB is a ban on offers of credit on prepaid cards whether they're in the form of an overdraft fee, a payday loan or something else.
"If overdraft, credit and payday loans are available, then it is entirely possible that many customers will use them, and some recognize that as a problem," Pew officials wrote in a summary of their survey findings. "Therefore, most want to avoid these temptations."
The survey found that 46% of prepaid card users said one major reason for their decision to use the product was an aversion to paying overdraft fees.
"It's to avoid the overdraft fees they've had in the past, and to avoid the struggles they've had with overspending," Alex Horowitz, a research officer at Pew, said Thursday during a conference call with reporters.
While overdraft fees are currently allowed on prepaid cards, they're uncommon. Only five of the 66 cards evaluated by Pew disclose an overdraft fee, while 53 of the cards make clear that cardholders can only spend the amount that they've loaded.
In large part because overdraft fees on checking accounts can be quite expensive, prepaid cards offer a cheaper alternative for many consumers, the Pew report found.
The least savvy group of consumers saves an average of $66 per month by using a prepaid card instead of a basic checking account, according to the report. On the other hand, checking accounts save the savviest customers about $5 each month over a prepaid card. (The report defined savvy consumers as those who do not visit out-of-network ATMs, use direct deposit to load their cards and take other steps to avoid fees.)
Pew finds that banks stepped up their involvement in the prepaid card market between 2012 and 2013. While the report is inconclusive about what sparked banks' interest, it suggests a potential reason: many of the prepaid cards being issued by banks are not subject to the legal cap on swipe fees, known as the Durbin Amendment, while debit cards linked to checking accounts at large banks are.
Prepaid cards issued by BB&T (BBT), BBVA Compass, Fifth Third Bank (FITB), JPMorgan Chase (JPM), PNC Bank (PNC), Regions Bank (RF), U.S. Bank (USB) and Wells Fargo (WFC) were among the cards analyzed in the report.
Cards from JPMorgan, Regions and BB&T cracked the list of the 10 largest prepaid cards by load volume, though those banks still trailed far behind industry leaders such as Green Dot (GDOT) and NetSpend.
Many of the most common prepaid card fees are lower on bank-issued cards, the report found. The median cost of buying a bank-issued card is around $4, versus $10 for a card from a nonbank. The median monthly fee on bank-issued cards is $4.95, compared with $6.95 on cards from nonbanks.
One exception to that general trend was out-of-network ATM fees. Banks charged a median fee of $2.50, while nonbanks charged a median fee of $2.
While the Pew report was generally complimentary of banks for fostering competition and lowering prices in the prepaid card market, the authors also noted that most of the bank-issued cards they analyzed do not offer electronic bill pay to their customers.
As a result, consumers who use bank-issued prepaid cards may need to buy cashier's checks to pay their monthly bills.
Why do many banks fail to offer online bill pay with their prepaid cards, in contrast with many of their nonbank competitors? The Pew report suggests a likely reason: there's a key difference between how the products are regulated, depending on whether or not they're issued by a large bank.
"Large bank-managed prepaid cards are not able to offer online bill pay features and retain the exemption from the Durbin Amendment," the Pew report notes.