Are Prepaid Cards a Risky Choice for Consumers?

Prepaid cards have caught us all a bit by surprise.  Sure, the Federal Reserve tabbed them the fastest growing form of electronic payment between 2006 and 2009, but it wasn’t until the Fed capped debit card swipe fees, costing banks $8.04 billion in annual revenue and sparking a prepaid card boom that consumers really took notice.

Even industry insiders have been a bit late to the prepaid card party.  According to Susan Weinstock, one of the lead researchers for the Pew Charitable Trusts, it took 11% of respondents to a Pew checking account survey saying that they use prepaid cards for her organization to turn its attention to these newly popular products.  What’s more, the new study that resulted – Loaded With Uncertainty: Are Prepaid Cards a Smart Alternative to Checking Accounts? – found that prepaid cards are desperately lacking attention from federal regulators.

The golden question, however, is this:  Does what we now know about prepaid cards indicate that using one is a good idea or not?

Unfortunately, the answer isn’t clear cut, as much depends on how you plan on using your card.

“If you’re going to overdraft a lot, a prepaid card may be a better option for you as a consumer given that you’ll pay a lot less in fees,” Weinstock said.  “If you never overdraft, if you’re very careful about using free ATMs, if you’re as we call it a ‘savvy customer’ about watching to make sure that you pay as few fees as possible, then you’ll probably be better off just having a checking account.”

It would certainly seem that you’d also need to be a savvy customer to simply find a prepaid card that suits your needs.  The Pew study analyzed 52 different prepaid cards, which together account for 75% of the market, and found that the lack of uniform fee disclosures, coupled with the fact that most cards have between 7 and 15 individual fees, makes it very hard for consumers to find a card that can be cheap and offers all of the features they need.

For example, you might want to replace your checking account with a prepaid card because your monthly fees recently went up – a familiar scenario for many of us.  You’ll need a card that offers online bill pay and direct deposit and charges less per month than that old checking account.  Trying to find a card that matches this description while sorting through a maze of fees designed to prevent you from understanding how much each card will truly cost when you use it certainly could prove difficult.

That’s not the only thing that the Pew study suggests checking account deserters should worry about when considering opening a prepaid card.  Another biggie is the fact that FDIC insurance is not required for funds held in prepaid card accounts.  Even if your prepaid card issuer advertises such a safeguard, a lack of federal oversight means that these claims could prove worthless.  With this in mind, it starts seeming a little risky to carry too much money on one at any given time.

Given the fact that the prepaid card market is growing at a rapid pace – the industry is expected to represent over $200 billion in assets by 2013, a more than 600% increase since 2009 – Pew is calling for the Consumer Financial Protection Bureau (CFPB) to act and essentially tame the prepaid card industry.  Whether the CFPB seizes its mandates from Congress and actually does anything remains to be seen, but prepaid cards are certainly on the organization’s radar.

“The CFPB has opened this Advance Notice of Prepared Rulemaking,” Weinstock said, referring to the CFPB taking steps to basically put prepaid card issuers on notice and get the regulatory wheels in motion, at least preliminarily.  “So, they are paying attention, and they are looking at these issues.”

Ultimately, while much relating to the prepaid card industry has proven unclear – from when the product would surge to popularity to whether using one is wise to when regulators will get involved – we do know one thing for sure:  We’ll all surely get to know prepaid cards better in the years to come.

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