Right now, it looks good for prepaid cards. In the wake of the “administrative fees” charged by some banks to make up for their losses due to regulation of interchange fees, many customers headed for credit unions or smaller banks.
To entice them back, banks touted the benefits of prepaid cards, which work like debit cards except one can begin building a credit history using the cards, and there’s no “administrative fees.”
According to the 2010 Federal Reserve Payments Summary, the prepaid debit card is outgrowing other segments of the card industry. [1] These cards are generally used by those who have low or average credit ratings and who have no access to traditional credit. Rather than carry cash, for convenience these customers carry the prepaid card.
But are these as desirable as the statistics indicate?
Consumer Reports performed an analysis of these cards which showed that prepaid cards have several flaws as opposed to traditional bank accounts or regular credit cards: [2]
· They can have very high, “hidden” fees present in the fine print.
· They don’t offer complete protection against identity theft that credit cards do.
· They may not be the credit-building vehicles that customers expect.
· FDIC account insurance may not work the same for prepaid cards as for bank deposit accounts.
The report found monthly fees in the $2.95 to $9.95 range. One of the biggest promoters of prepaid cards is WalMart, whose card has a $3.00 per month charge. Sources say some 7 to 9 billion dollars are put on these cards every year, making this a profitable line for the company.[3] These cards offer FDIC protection and are Visa or MasterCard branded, with the advantage of no overdraft fees.
What Consumer Reports’ study objects to most is the claim that people can improve their credit scores by using prepaid cards. This just isn’t so, the Consumer’s report concludes. The prepaid cards don’t give the credit bureaus enough information for the type of credit report they get from credit card use. This has not put a damper on their use, however.
The bottom line: expect more examination of fees and credit-building claims in the future.
This may also spell more regulation. So long as banks continue to profit from issuing prepaid cards, the business will remain stable, but more regulation could alter that rosy picture.
[1] http://www.frbservices.org/files/communications/pdf/press/2010_payments_study.pdf
[2] http://www.consumersunion.org/pdf/Prepaid_Cards_Report_2012.pdf
