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A consumer group concerned about the multiple fees associated with prepaid cards is asking the federal government for consumer protections similar to those tied to traditional debit cards.
In the report "Prepaid Cards: Second-Tier Bank Account Substitutes," Consumers Union staff attorney Michelle Jun writes that prepaid cards can be inferior to debit cards tied to checking accounts because the costs can be high and confusing, and multiple fees often apply. Moreover, not all prepaid cards provide adequate protection against theft of funds from fraudulent use of cards or card-account numbers, she says.
Consumers Union, publisher of Consumer Reports, is a Yonkers, N.Y.-based independent, nonprofit testing and information organization serving consumers nationwide.
Though the industry has taken steps recently to lower prices, Consumer Union does not believe it is happening soon enough, especially as the industry continues to grow.
One major sticking point is fees. Prepaid card issuers should provide fee information in a simple, comprehensive chart, Jun suggests.
"Oftentimes you go to their Web sites, and ... you don't find the fees upfront and center, and there are a lot of them," she tells ATM&Debit News. "Regardless of what population you're looking at, all consumers would be totally confused about the fees these prepaid cards have, mostly because they are not displayed prominently anywhere."
To improve that situation, Jun suggests that prepaid card issuers be required to use the so-called Schumer Box, which credit card issuers must use to outline card terms in promotional material. Congress enacted the Schumer Box law in 1998, and it took effect in 2000. U.S. Sen. Charles Schumer (D-N.Y.), a House representative at the time, introduced the bill.
In addition, Jun suggests in her report placing a cap on how much consumers pay per month for a prepaid card. Consumer protections on prepaid cards must be improved to equal those of traditional debit cards, Jun adds.
Though consumers often view prepaid cards as products for the unbanked and underbanked population, the recession has led to use among individuals from all demographics, she adds.
The Center for Financial Services Innovation, which is based in Chicago, says in a statement regarding Jun's report that its own research indicates consumers who use prepaid cards "are financially savvy and are making the choice to use a prepaid account for a variety of reasons." Among them include access to a mainstream financial-services product and the fact that prepaid cards are difficult to overdraw.
One prepaid executive says the industry already is responding to market pressures to reduce fees. Though the report points out some obvious issues, the industry is making strides by lowering its prices in such key areas as price, reloads and monthly maintenance, says Jerry Welch, CEO of Tampa, Fla.-based prepaid card provider nFinanSe Inc.
"The great thing about America is consumers are very smart and you'll listen to them and you'll respond, and our industry is going to do that," Welch tells ATM&Debit News.
Indeed, some large prepaid card providers already have lowered fees this year. In February, Wal-Mart Stores Inc. reduced its upfront, reload and monthly maintenance fees to $3 each. Green Dot Corp. and nFinanSe followed suit with their own price reductions.
The Center for Financial Services Innovation's research suggests that the largest prepaid card providers are among the lower-cost providers.
But the reduced fees have not been enough to satisfy Consumer Union. Jun suggests in her report that Congress should expand Regulation E of the Electronic Funds Transfer Act to include all reloadable prepaid cards and reloadable gift cards with a balance of at least $250.
Lawmakers established Reg E in 1978 was established to give consumers and financial institutions a set of guidelines and protections in the event of an unauthorized debit card transaction.
But Welch believes such government regulations are unnecessary because consumers ultimately will force change based on their choices. "The consumer is going to vote, and I just don't see that having high fees and hidden fees and poor customer service is going to win the consumer," he says. ATM
