Increasingly, consumers are leaving traditional banking avenues and moving towards alternative sources of money management such as prepaid cards. According to Nilson, “the top 50 largest US Banks and credit union issuers of general purpose prepaid card accounted for $118.09 billion in spending at merchants in 2013.” Additionally, the Mercator Advisory group found that from 2008 to 2012 the amount of money loaded on to general-purpose, reloadable debit cards tripled, rising to $76.7 billion. Mercator estimates that number will rise to $168.4 billion this year.
While prepaid cards seem to be here to stay, there are surprisingly few legal protections available to consumers who use prepaid cards. The Consumer Financial Protection Bureau (“CFPB”) has introduced a proposal that would extend greater protection to consumers who use prepaid cards; however, until new rules are passed (a long and uncertain process) consumers are left to fend for themselves. While there are many dangers associated with using prepaid cards, there can be a number of benefits as well. Below I summarize a few of those benefits and dangers.
Benefits
- Alternatives to Banks: Prepaid cards present an alternative for consumers who do not have a traditional bank account. Consumers may not use a traditional bank account due to preference, poor credit, or a number of other reasons. Using prepaid cards, consumers without a bank account can do things that require a credit card. Examples include renting a car or booking a hotel room. Additionally, many prepaid cards include account numbers that allow for direct deposit of paychecks.
- Helps to Manage Money: For consumers without a traditional bank account, paying bills can be a stressful and expensive process that includes paying for and sending out money orders. Prepaid cards can create cost savings by allowing consumers to pay for utility or other bills using their reloadable, prepaid cards.
- Helps to Develop Budgeting Skills: Finally, prepaid cards allow consumers to develop smart budgeting skills. Loading a specific amount of money onto a prepaid card allows consumers to stick to their budgets and learn where they might be overspending. Additionally, consumers with children can use prepaid cards to start developing their kids’ budgeting habits early. Developing wise budgeting habits is key to financial stability.
Dangers
- Excessive Fees: Some prepaid card issuers take advantage of consumers by charging fees for seemingly everything. There are examples of prepaid cards that will charge a fee for loading money, withdrawing money, or even to check your card balance. To make sure your prepaid card does not nickel-and-dime you, it is important to do your research before deciding on which prepaid card to use.
- Limited Consumer Protections: As mentioned before, there are very limited legal protections for users of prepaid cards. The CFPB has proposed potential rules, but as of now consumers using prepaid cards do not have the traditional protections afforded to consumers using traditional banks.
- Potential Overdraft Fees: Some prepaid cards have a credit feature that allows consumers to spend more than is loaded onto the card. This can result in high overdraft fees, such as those that once plagued the debit card world. Before settling on a prepaid card, consumers must determine whether the card has credit features and charges high overdraft fees.
- No Loss or Theft Protection: Some prepaid cards will not pay back consumers who have funds stolen or loss due to an error. This can result in innocent consumers losing hard-earned cash by no fault of their own. Again, one must read the terms applicable to the card — as all cards are not the same.
- Potential Lack of Insurance: Almost all checking accounts at banks are federally insured up to $250,000. This means if a consumer’s bank ever fails or loses the consumer’s money, the consumer will be protected. Prepaid cards do not come with the same type of protections.
While prepaid cards can offer many benefits to consumers, there are significant dangers that consumers must be aware of. As always, before using a prepaid card do your research and determine which card gives you the best protections. You can find a great resource for finding consumer friendly prepaid cards here.