If you keep your checking account in good standing and use direct deposit, there’s likely no reason for you to ever consider getting yourself a prepaid card. But the industry’s rapid growth indicates that plenty of Americans find them useful: the industry is expected to reach $201.9 billion in 2013, according to Mercator Advisory Group. And according to new research by the Pew Charitable Trusts, there are big savings to be had for a certain breed of customer: specifically the disorganized and/or poorer consumers who frequently overdraft their accounts.
Pew’s study, called Loaded with Uncertainty: Are Prepaid Cards a Smart Alternative to Checking Accounts?, examines 52 general-purpose reloadable cards (GPRs) to assess what sorts of fees each charges for which services and what sort of consumer protections GPRs offer to consumers compared to checking accounts. Overall, the findings did not speak in the nascent industry’s favour.
Among the main indictments against prepaid cards were: the fee schedules vary so much from card to card that it’s difficult for consumers to comparison shop; they are not covered by Electronic Fund Transfer Act protections; some offer overdraft, which is “antithetical” to their purpose; and deposits might not be insured by the FDIC.
As we’ve discussed here, fees are simply all over the place for prepaid cards. Most charge monthly fees, others do not; many charge loading fees, others do not. If a consumer doesn’t know to really check under a card’s hood, so to speak, when buying one, she might find herself fleeced of a lot of money. The worst part about this, as Pew points out, is that many fees — or lack thereof — are not disclosed properly by the prepaid providers because there is no standard set of fees in existence.
For example, about 60 per cent of prepaid cards do not say whether or not they charge a fee for a declined point-of-sale transaction. Those that do charge a median of $1 per, but most that do not make no indication one way or another.
Furthermore, GPRs exist in a strange regulatory limbo. The report explains that GPRs are not regulated by the Electronic Fund Transfer Act, which requires financial institutions to investigate claims of unauthorised activity and also to provide paper statements. Paper statements typically come with a fee for GPRs (checking accounts don’t directly charge a fee for paper statements, but instead incentivise “going paperless” by offering cut-rate monthly fees) and other services, like fraud prevention, are provided on a “discretionary basis.”
FDIC insurance is offered on most major GPRs in the form of “pass-through” insurance, but Pew indicates it’s possible that, in the event of both a bank failure and bad record-keeping, GPR customers could potentially lose their deposits. Reason being: “the funds must be held in an FDIC-insured account and the balances and identifications of the actual owners of each GPR prepaid card must be tracked by either the company or the bank. Failure to do so would cause only the larger account itself to be insured, but not the individual prepaid cardholder.”
On all these fronts, prepaid cards look a lot less attractive than a checking account.
Good for some; far from good
Still, for a certain set of consumers, prepaid cards are cheaper than checking accounts. By splitting hypothetical customers into three groups: Savvy, those who avoid fees and use direct deposit; Basic, those who overdraft/POS decline once a month and are not so savvy otherwise; and Inexperienced, those who really do not know how to avoid fees. For Savvy customers, checking accounts are the way to go, and for Basic customers, it’s a bit of a wash. For that last group, the Inexperienced, they actually benefit from using a prepaid card instead of a checking account.
For this class of customer, a checking account’s median costs are $94 a month in fees, while a prepaid card’s median monthly cost is $28.70. That’s not cheap! But it is a better financial management tool for those who can’t, well, manage their finances.
That said, a new breed of prepaid card is cropping up, which offers something more comparable to a checking account with less of the downside: overdraft fees and high monthly maintenance fees. Chase’s Liquid Card is perhaps the best example. It costs just $5 a month, and offers all the conveniences of a checking account — like, for example, deposits at Chase’s nationwide ATM network — but without the checks. These might be reasonable replacements to checking accounts, and they have built-in revenue streams for banks already in the form of monthly service fees and Durbin-exempt swipe fees.
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