Prepaid debit cards are billed as a better way to manage your money, a smart alternative to checking accounts. With a prepaid card there’s no credit check and no minimum balance required. Since you can’t spend more than you load on the card, there are no overdraft penalty fees. (Note: Some prepaid cards now offer overdraft protection for a fee, defeating one of the main reasons to have the card.)
No wonder this formerly niche financial product has gone mainstream. Millions of people now use them for shopping, to transfer money to kids in college or receive federal benefits.
According to the Mercator Advisory Group, a financial consulting company, Americans will load about $200 billion onto general reloadable prepaid cards this year, a 600 percent increase from 2010. (This figure does not include traditional gift cards.)
The nation’s bankers have noticed the trend and they have moved into this market, according to a new survey out today from Bankrate.com. That’s generally good news for consumers.
“Some of the large national and regional banks that started to offer these cards recently have lower fees and a pretty transparent fee structure,” said Greg McBride, Bankrate’s senior financial analyst. “They often have just one monthly fee and they allow the cardholder to use the bank’s ATM network for free withdrawals and its branches for free reloads.”
Consumer advocates agree: Some prepaid cards can be a convenient and cost-effective financial tool. But they point out; some of these cards still have all sorts of “gotcha” fees to watch out for. Some have an activation fee of as much as $15. There can also be an inactivity fee, a declined transaction fee and a charge to contact customer service.
“The pricing of prepaid cards is highly variable and it’s behavior driven,” said Tom Feltner, director of financial services at the Consumer Federation of America. “If you don’t manage your transactions in a way to minimize fees, you could wind up with a very high monthly charge, in many cases exceeding what you would pay for a comparable checking account.”
The good news is that a lot of these fees can be avoided. That’s why it’s so important to figure out how you’ll use the card before you get one.
“There’s not a one-size fits all answer in terms of which card is right for you,” McBride told me. “Determine which fees you will and won’t incur and which card is going to produce your lowest total monthly cost.”
For its just-released 2013 Survey of Prepaid Debit Card Fees, Bankrate looked at 24 widely issued prepaid cards. Here are some of the key findings:
Monthly service fees
- 63 percent charge a monthly service fee ranging from $3.00 to $9.95. Eight of the 15 cards that charge a monthly service fee offer a fee waiver or reduction, which is usually based upon how much money is automatically loaded onto the card.
- Two-thirds of the cards do not have activation fees if purchased online. Fifty-four percent can be purchased in-person without an activation fee.
- All 24 cards surveyed charge a fee of $1.50 to $2.75 per transaction to withdraw money from another institution’s ATM.
- 54 percent charge an ATM balance inquiry fee ranging from $0.45 to $1.00 regardless of which network the ATM belongs to.
- 17 percent charge for all customer service calls, with $2.00 the most common fee. Eighty-three percent provide at least one free call per month.
- 21 percent charge between $0.25 and $1.95 for each declined transaction.
- 29 percent charge an inactivity fee which ranges from $1.95 to $5.95 a month. It typically begins after no activity for at least 90 days.
Are these cards insured?
Most of them are covered by FDIC insurance, but not all. It’s up to the card provider to decide whether to offer it. They can choose to be governed by state money transmitter laws which do not offer the same level of protection as federal insurance.
"If the card is not federally insured and the company goes under, there’s no telling if or when you’ll get your money back,” noted Susan Weinstock, director of the Safe Checking in the Electronic Age Project at Pew Trusts. “We think there should be a requirement that all prepaid cards have FDIC insurance, so a customer knows their funds are protected.” (Read: Imperfect Protection from Pew)
The prepaid card industry says insurance is not an issue and customers have nothing to worry about.
Two weeks ago, American Express started offering FDIC insurance on its new Bluebird card. Other AMEX prepaid cards are not covered by the FDIC.
A few more things you should know
Prepaid debit cards are different from credit cards or even debit cards tied to a checking account. They may not provide the same level of protection again loss or fraud.
Ed Mierzwinski, director of consumer programs at U.S. PIRG, doesn’t think most people understand the difference.
“You need to realize that a prepaid card is just like cash. You could lose all of the money on the card,” he said. “And you don’t have a lot of rights, if any at all, when you have problems with the card.”
The prepaid card industry disagrees.
“You get the same fraud protection as with any other debit card,” said Judith Rinearson with the Network Branded Prepaid Card Association. She explained that Visa, MasterCard, American Express and Discovery all have zero liability policies if the card is lost, stolen or misused.
Ruth Susswein with the advocacy group Consumer Action said they’ve found that most prepaid cards do “voluntarily” apply the debit card protections and limitations on fraud liability. She doesn’t think that’s good enough.
“When a protection is offered voluntarily, it can disappear at any time and for any reason,” she said. “With all of the money pouring onto these cards, they need to have mandatory fraud and loss protection at least at the level of a traditional debit card, and that’s not the case.”
Rinearson told me the industry is working to change that, so federal regulations would treat a prepaid card like any other debit card.
Consumer Action: Prepaid Card Survey 2012