Finding the Right Prepaid Card Isn't Easy

Prepaid cards are still a new specimen and consumers are often uncertain about how to deal with them. A new report from the Pew Charitable Trusts highlights some of the most common concerns.

Pew researchers looked at 52 prepaid cards that made up 75 percent of the market in 2011 and found that:

The varying fee structures and disclosures for prepaid cards make comparison shopping very difficult because most products have 7 to 15 individual fees to consider and their disclosures are not uniform.

The cost of prepaid cards can be less than checking accounts, but the cards come with significant risks. These products are not covered by laws requiring disclosure of fees and terms - nor those that limit consumer liability for unauthorized electronic fund transfers.

Most consumers use prepaid cards as a way to keep spending within their means; overdraft options run counter to this goal and should not be offered.

FDIC insurance does not necessarily apply to funds loaded onto GPR prepaid cards. Those companies that claim funds are FDIC-insured are not federally supervised and, therefore there is no guarantee the protections are executed correctly.

ConsumerAffairs found about 130,000 consumer comments about prepaid cards on social media sites like Facebook and Twitter over the last year. A computerized sentiment analysis of those comments finds net sentiment plummeting from 72% to just 36% in the last 12 months, presumably as consumers gain experience with the good -- and bad -- aspects of the cards.

Starsky of Cranston, RI, is one consumer who has learned to be wary of prepaid cards.

"I had enough funds on the card to make an iTunes transaction. When iTunes submitted the payment request, Green Dot refused payment after they already approved it. Do prepaid cards not have to follow regulations of "Must Pay Items"? Now my iTunes account is frozen until funds are paid. When I worked for a bank, this was deemed as illegal: to not pay a 'Must Pay Item' when there was prior payment approval by the financial institution," Starsky said.

It's not just consumers who are learning to be wary of prepaid cards. We recently heard from Paul of Manitou Springs, Colo.: "I am a hotel owner. A customer charged $678.09 in room charges which was later debited from our account as a charge-back for insufficient funds. This happened 33 (thirty-three) days after the transaction was processed and despite the fact that an authorization number was obtained for this transaction at the time it was processed. I got nothing but runaround from Green Dot."

The full text of the Pew study is available online. 

Regulation pending

The cards may eventually be more tightly regulated than they are now. The Consumer Financial Protection Bureau (CFPB) is drafting rules but the timetable for enactment is unclear.

The CFPB said in May that its rulemaking will focus on "General Purpose Reloadable" prepaid cards which allow consumers to load the cards with money upfront and use them as if they were checking account debit cards. 

According to a 2009 FDIC study, 9.7 percent of all households used these prepaid cards.  It is projected that the total dollar amount loaded onto prepaid cards will hit $167 billion in 2014.

"The people who use prepaid cards are, in many instances, the most vulnerable among us," said CFPB Director Richard Cordray. "All consumers need, and deserve, products which are safe and whose costs and risks are clear upfront.  Yet right now prepaid cards have far fewer regulatory protections than bank accounts or debit or credit cards.  That's why we are launching a rulemaking to promote safety and transparency in this emerging market."

Consumer groups have urged the CFPB to ban overdraft and credit features on the cards. 

"The most important step that the CFPB can take to ensure that prepaid cards fulfill their promise, and to prevent unfair, deceptive or abusive practices, is to ensure that prepaid cards are true to their essence as a prepaid transaction product," according to comments submitted by the Center for Responsible Lending, the National Consumer Law Center and the Consumer Federation of America.