Pew Finds Prepaid Cards More Affordable but Risky for Managing Money

Growing Number of Americans Rely on New Financial Product with Little Regulatory Oversight

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A report released by The Pew Charitable Trusts finds that general purpose reloadable prepaid cards have become increasingly accessible for consumers and in many instances are now more affordable than basic checking accounts. Although prepaid cards offer many benefits to consumers, protections lag far behind other banking products. There are no federal laws or regulations to protect consumers from hidden fees, unauthorized transactions, or loss of funds.

A general purpose reloadable (GPR) prepaid card is a relatively new consumer financial product growing in popularity: a debit card that is not attached to a traditional, individual checking account. The cards can be used at ATMs and retail cash registers, and to make purchases online. U.S. consumers loaded more than $64 billion onto the cards in 2012, more than double the amount loaded in 2009.

“More consumers are turning to prepaid cards as a convenient tool to control spending and fees,” said Susan Weinstock, who directs Pew's safe checking research. “While prepaid cards offer many benefits to consumers, they are a relatively new product with little oversight. A lack of protections undermines prepaid cards as a safe and easy way to manage money.”

The report, "Consumers Continue to Load Up on Prepaid Cards", looks at developments since 2012 when Pew released its first study of the market, and includes policy recommendations for the Consumer Financial Protection Bureau (CFPB). One trend is that three of the 10 largest prepaid cards are now offered by banks, whereas none were in 2012.

Among the findings:

  • Prepaid cards offered by large banks are particularly economical compared to the cards studied in 2012.
  • When comparing the cost of prepaid cards and checking accounts offered at the same large financial institutions, prepaid cards are often a better deal. 
  • Prepaid cards do not offer consumers the limited liability protection required by federal law for checking accounts, mostly due to omissions in the terms provided, but sometimes because of shifts of liability onto the cardholder.
  • The terms of almost all prepaid cards explicitly state that customers' funds would be covered by FDIC insurance, but some disclose that they do not—with disclosure much clearer in 2013 than it was in 2012.
  • Arbitration agreements, which require a customer to settle any dispute using a private, third-party decision maker, are increasingly included in prepaid cardholder agreements.
A Pew national survey, "Why Americans Use Prepaid Cards", found that most customers' primary motivation for using prepaid cards is to gain control over their finances, including avoiding credit card debt and overdrafts. Among those who have had a checking account, 2 in 5 have closed or lost an account because of overdraft fees. Pew's research has found that prepaid cards currently have inconsistent overdraft practices.

To make prepaid cards safer for consumers, Pew recommends the following to the CFPB:

  • Prepaid cards should not have overdraft or other automated or linked credit features.
  • Prepaid cardholders should be protected against liability for unauthorized transactions that occur either when a card is lost or stolen or a charge is incorrectly applied. 
  • Prepaid cardholders should have access to account information and transaction history.
  • Prepaid cards should be required to provide information about terms, conditions, and fees in a uniform, concise, and easy-to-read format. This information should be included with the card packaging so that it is accessible pre-purchase at retail outlets as well as online. 
  • Prepaid card funds should be federally insured against loss caused by the failure of an institution.
  • Predispute binding arbitration clauses in cardholder agreements, which prevent cardholders from having the choice to challenge unfair and deceptive practices or other legal violations in court, should be prohibited.
To conduct this work, Pew examined disclosures and fee structures of 66 prepaid cards. Pew researchers looked at all of the documents and disclosures available on the websites of American Express, MasterCard, Visa, and the 10 largest retail banks that offer a prepaid card.

The Pew Charitable Trusts is driven by the power of knowledge to solve today's most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public, and stimulate civic life.

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