According to a new report released by The Pew Charitable Trusts, general purpose reloadable (GPR) prepaid cards—used to make purchases, withdraw money from ATMs, and pay bills—can be used as an alternative to traditional checking accounts, but come with added risks. Loaded With Uncertainty: Are Prepaid Cards a Smart Alternative to Checking Accounts? also shows that the industry is growing rapidly and largely unregulated. Accounting for only $28.6 billion in consumer assets in 2009, the industry is expected to top $200 billion by 2013, an increase of over 600 percent.
“The prepaid card market is an evolving industry that has inconsistent fee structures and services, which are confusing to customers,” said Susan Weinstock, director of Pew's Safe Checking project. “Consumer protections are needed to ensure that people are not misinformed and can comparison shop among products, including traditional checking accounts. We look forward to the new rules covering prepaid cards that the Consumer Financial Protection Bureau is slated to announce later this year.”
Pew reviewed 52 prepaid cards that cover at least 75 percent of the market in 2011 and found:
- 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 range for the median cost of the common fees Pew tracked, such as monthly and ATM fees, was $0.50 to $9.95.
- The cost of prepaid cards can be less than checking accounts, but they 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 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.
In light of the future guidelines that the Consumer Financial Protection Bureau (CFPB) will be putting forth, per the Advance Notice of Proposed Rulemaking issued in May 2012, Pew recommends the following:
- Clear and uniform disclosures;
- Supervision by the CFPB to prevent unfair, deceptive, or abusive acts or practices;
- Regulations prohibiting GPR prepaid cards from offering overdraft plans; and
- Federal supervision of GPR prepaid card providers to ensure that FDIC pass-through insurance procedures are followed.
Methodology: Pew examined the account agreements, fee schedules, and other web pages for the 52 GPR prepaid cards that are available for purchase online at the websites for American Express, MasterCard, and Visa. This sample, which represents at least 75 percent of the market, typifies the kinds of prepaid cards a consumer can choose, based on load volume data from Mercator Advisory Group. This research reflects the information that was available online at GPR prepaid card websites. Pew did not make any assumptions about information that was not disclosed.
The Pew Charitable Trusts is a nonprofit organization that applies a rigorous, analytical approach to improve public policy, inform the public, and stimulate civic life.