Prepaid Cards: Conveniently Risky?
NEW YORK ( MainStreet) Despite the fact that more and more Americans rely on prepaid cards as an alternative to credit cards and checking accounts, federal laws and regulations may not be keeping up to protect consumers.
That was the finding of a new study released by The Pew Charitable Trusts on the popular but still relatively new prepaid product .
Reloadable prepaid cards work just like a debit card but it is not attached to a traditional, individual checking account. However, it still can be used at ATMs, retail shops and 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 study finds while these cards offer many benefits to consumers, protections lag far behind other banking products, and there are few regulations to protect consumers from hidden fees, unauthorized transactions or loss of funds.
The report, "Consumers Continue to Load Up on Prepaid Cards," follows the trust's first look at the market in 2012. Pew looked at disclosures and fee structures of 66 different prepaid cards. Pew researchers also looked at all of the documents and disclosures available on the websites of American Express, MasterCard, Visa and the ten largest retail banks that offer a prepaid card.
One trend the study found was that banks now offer three of the ten largest prepaid cards, whereas none were in 2012. In fact, prepaid cards offered by larger banks proved very economical when compared to cards studied in 2012. Furthermore, when comparing the cost of prepaid cards and checking accounts offered at the same large financial institutions, prepaid cards are often a better deal.
However, prepaid cards did not offer consumers the limited liability protection required by federal law for checking accounts mostly due to omissions in the terms provided but instead sometimes because of shifts of liability onto the cardholder, the study found. The research also discovered while terms of many prepaid cards explicitly state that customers' funds would be covered by FDIC insurance, some disclose the funds are not insured. Lastly, arbitration agreements which require a customer to settle any dispute using a private, third-party decision maker are increasingly included in prepaid cardholder agreements.
In an effort to make prepaid cards safer for consumers, Pew is recommending to the Consumer Financial Protection Bureau prepaid cards should not have overdraft capabilities so consumers can avoid fees associated with overdrawing funds and 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.