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Why Prepaid Card Users Have Their Panties in a Twist

By Robert McGarvey

NEW YORK (MainStreet) -- Confusion. That is the one word summation of consumers thinking about the protections they have, or may not have, when they use prepaid cards.

"Most consumers have no idea what protections come with prepaid cards," said Leslie Tayne, a Long Island lawyer who specializes in debt and credit counseling. She added: "There are so many variations, it makes your head spin."

"There's a lot of confusion and there also is a multitude of flavors of prepaid cards," said Terry Maher, corporate counsel to the Network Branded Prepaid Card Association, a trade group.

Maher's point: different cards carry vastly different protections and therein lies a potential for a world of consumer misery.

Lose a credit card and matters are simple. The Fair Credit Billing Act caps losses on a lost or stolen credit card at $50, and zero if loss is reported before any misuse.

With debit cards, the Electronic Funds Transfer Act kicks in, and it caps losses at $50 if loss is reported within two business days of learning it happened, $500 if notification is made within 60 calendar days, and losses are unlimited if notification is not made within 60 days.

Here's the problem with prepaid cards: With some, when you lose one, you lose, period; the dough evaporates. With others, protections - although not as good as credit cards - but exactly equal to those of debit cards apply, said Bertrand Sosa, a founder of prepaid card leader NetSpend who now is president of Rev Worldwide, a payments innovator. He admitted however that "there are fly by night operators who hurt the industry's reputation." And of course they also hurt the consumers they fleece.

This matters, because the prepaid card market is huge and it is getting bigger.

Research firm Mercator pegged the amount Americans will put on reloadable prepaid cards this year as over $200 billion, up from $28.6 billion in 2009, and now two of the biggest banks - Chase and Wells Fargo - offer their own prepaid cards.