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Sheriff Menendez Takes on the Wild West of Prepaid Debit

Feb. 2, 2012
Personal Finance
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As we’ve been saying, prepaid debit cards are high in fees and low in rewards, especially when compared to free checking accounts (which still exist, by the way): a typical user could pay an average of $300 a year. Even an industry study which supports prepaid card use acknowledges that fees can top $380 a year.

And one of our biggest concerns about prepaid cards is that they’re unregulated, with no easy way to compare and understand their fees. It’s our job to read disclosures, and even we had trouble deciphering the fees when we built our prepaid comparison tool. And if we spend hours staring at terms and conditions, we’re willing to bet that your casual user doesn’t always know what he’s getting into.

Fortunately, someone’s been fighting at the federal level to curb prepaid debit card fees and increase transparency in the prepaid card industry. U.S. Senator Robert Menendez, from New Jersey, recently introduced new legislation that will address issues that have plagued owners of prepaid debit cards.

“It seems we have continuously seen these companies become creative when it comes to finding new and more devious ways to make consumers pay more than they have to for what appears to be simple financial services,” Senator Menendez said at a press conference at Garden State Plaza in Paramus, NJ.

Called the Prepaid Card Consumer Protection Act, the legislation Menendez proposed would, in a nutshell:

  • Require complete disclosure of all fees before the consumer pays the card, including a wallet-sized summary of the fees and a toll-free customer service telephone number
  • Limit the types of fees that can be charged
  • Ensure that consumer protections would be offered to owners of prepaid cards (extending the reach of “Regulation E,” the Federal Reserve’s rules implementing the Electronic Fund Transfer Act), as well as FDIC insurance to protect consumers’ money

The Problems with Prepaid Debit Cards

Prepaid cards have largely escaped the regulations that have restricted other forms of payment cards, including even gift cards.

“They are still in the Wild West,” said Charles Bell, a programs director for Consumers Union (publisher of Consumer Reports) who has testified before Congress about the issue of prepaid debit cards.

Even if people have begun to recognize the evils of prepaid debit cards’ fees, these kinds of cards still don’t have the same guaranteed consumer protections as debit cards and checking accounts. With their weak financial protections, owners of prepaid debit cards stand to lose their money if their card is lost or stolen. What’s more, prepaid credit card companies aren’t bound to state their cards’ fees fully and clearly before customers buy them. Currently, you can figure out a card’s fees only after you buy it and attempt to decipher the fine print packed with the card, which “you obviously would need a lawyer to figure out,” Menendez said.

In addition to cutting down on the type of fees prepaid debit cards could levy, Menendez’s bill would require prepaid card companies to clearly and completely state the fees that would be charged, before the consumer buys the card, as well as ensure that consumer protections and insurance are offered to all prepaid debit card owners.

Prepaid Debit Cards’ Growing Popularity

This isn’t Senator Menendez’s first attempt to regulate prepaid cards; he proposed a similar bill last year, which did not make it out of the Senate Banking Committee, according to congressional records. But this year’s proposal comes during a boom in the prepaid debit card industry. According to a recent report by the Mercator Advisory Group, the amount loaded onto “open loop” prepaid cards will increase 383 percent between 2009 and 2012, from $60.4 billion to a whopping $233.8 billion. The total prepaid market size in 2012 is forecast to be $549.7 billion, an increase of over 200%.

So who’s buying all those prepaid cards, anyway? An aide to Senator Menendez says that there are two demographic groups that buy into the prepaid card market.

The first, which are called “unbanked” or “underbanked” consumers, “tend to be African American or Hispanic and in areas of poverty or in areas where, frankly, there’s just not access to traditional banking,” the aide explained.

Young consumers in their 20s makes up the second group, the aide said, and “the problem with that too is that they don’t really understand the differences between what a prepaid card is and what a credit card is; they just assume them all to be credit cards.”

The prepaid cards cater to young consumers with their glitzy celebrity photos and endorsements—which is probably why Russell Simmons, the Kardashians, and Lil Wayne have all appeared on prepaid debit cards.

But for all the glamor of prepaid debit, “when they’re lost, the money’s gone; when they reload them, there are fees that [consumers] don’t know about,” the aide said. “The big part of our bill is to mandate the type of uniform disclosure where, when you buy a card like this, it says, ‘Here are the fees, this is what it’s going to cost you.’”

Alternatives to Prepaid Debit Cards

Senator Menendez’s proposal is a good first step toward increasing regulations on prepaid debit cards. For now, we’d advise you to steer clear of these little buggers. Even if you have bad credit, or really, really like the Kardashians, there are so many better options out there. Our prepaid debit card comparison tool gives a personalized estimate the cost of both prepaid and traditional debit cards, but in general we’ve found that checking beats our prepaid. And if you’re looking to build your credit score, you’ll need a line of credit – a secured credit card might be the best option for doing so.