The prepaid card industry has an image problem.
Even as some prepaid card marketers have simplified fee disclosures and lowered certain charges to be more consumer friendly, regulators and watchdog groups are ramping up their scrutiny of the industry as a whole for unfair practices.
The investigation announced Thursday by Florida's attorney general into five prepaid card companies' fees is likely to spark further probes and fuel calls to eliminate certain practices entirely, experts say.
"This is the beginning I think of probably more than one look at this by state government, especially if Florida finds anything that they deem to be either a violation of their laws or an unfair practice," said Ben Jackson, a senior analyst for the prepaid advisory service at Mercator Advisory Group in Maynard, Mass.
Attorney General Pam Bondi's office said it is looking at "possible hidden fees" as well as promises that prepaid card companies have made to improve consumers' credit. A spokeswoman for Bondi's office did not make a representative available for an interview or respond to emailed questions on Friday.
The office issued subpoenas to Green Dot Corp., NetSpend Holdings Inc., AccountNow Inc., First Data Corp. and UniRush LLC seeking information on policies for handling customer disputes and in some cases, documents substantiating claims that using their cards repairs credit and are cheaper than traditional bank accounts. It also requested to see the cards' packaging.
Steve Streit, the chairman, chief executive and president of Green Dot, said in emailed responses to questions provided by a spokeswoman that "the rapid growth of the prepaid industry has certainly and appropriately caught the eye of those agencies concerned with consumer protection and, just like with traditional banking products, my expectation is that such scrutiny isn't likely to go away anytime soon."
Streit said he thinks the Florida attorney general's inquiry could benefit Green Dot by demonstrating the transparency of its fees.
Prepaid cards have gained more attention as providers have pitched the cards as a low-cost alternative to mainstream bank accounts. Companies like Green Dot, NetSpend and UniRush market primarily to underbanked or unbanked consumers who may not qualify for traditional checking accounts.
In 2009, $28.6 billion was loaded on to open-loop, reloadable prepaid cards in the U.S., according to Mercator. By 2013, that figure is expected to reach $201.9 billion.
Industry experts said it is likely new regulations will be introduced dictating the type of fees the card providers can charge. Last year Sen. Robert Menendez, D-N.J., introduced a bill that would ban overdraft, balance inquiry, inactivity and other fees on prepaid debit cards. The new Consumer Financial Protection Bureau is already planning to examine prepaid card disclosures and other practices, industry executives said.
Crystal Wright, a spokeswoman for the Network Branded Prepaid Card Association, said the trade group has had discussions with CFPB representatives about developing tools that would help consumers compare the costs of different prepaid cards. She said the agency supports clear disclosures of fees and encourages getting "bad apples out of the marketplace."
Lauren Saunders, managing attorney of the National Consumer Law Center, a nonprofit advocacy group, said the industry in general could afford to improve transparency.
Many fees "are not necessarily clear in a way that consumers understand when they read" disclosures, Saunders said. The group opposes fees for overdraft, declined transactions and others that some prepaid card companies charge.
AccountNow and the others targeted in the Florida investigation manage customer accounts and market the cards but rely on partner banks to issue them.
Jim Jones, the CEO of AccountNow, of San Ramon, Calif., said in an interview on Friday that his company has taken steps to ensure its practices and representations are "fair and accurate." AccountNow, along with UniRush, media mogul Russell Simmons' company that markets the RushCard, were the only two companies from which the Florida attorney general's office requested information on credit reporting practices.
In the past, Jones said, AccountNow advertised that it reported customers' use of its prepaid cards to PRBC, an alternative credit bureau for consumers with little or no credit history.
AccountNow in recent months has eliminated references to the service from its advertising because "we felt that fewer lenders were using alternative credit standards for evaluation," Jones said.
UniRush on its website advertises a service called RushPath to Credit, which it says helps consumers "build a positive credit file" by reporting bill-payment activity to LexisNexis and PRBC.
"These people may in fact be demonstrating that they're a good credit risk through their use of prepaid cards and they're using cards to keep up to date on bills and other sorts of payments but if no one looks at that data that could be an issue." Jackson said.
Gil Luria, a senior vice president at Wedbush Securities, said Green Dot and NetSpend, which went public last year, have made significant strides to improve transparency as a whole.
The actions of individual players have hurt the industry as a whole and will be a factor that all companies will have to contend with, Luria said.
"This is going to continue to be part of their business," he said.