Interest in Prepaid cards growing Consumers like convenience; advocates warn of hidden costs
Dayton Daily News - May 4, 2012
About 1.3 million households in Ohio use few or no traditional banking services, and members of this group are increasingly relying on prepaid debit cards to meet their financial needs, according to studies.
Prepaid cards allow consumers to pay bills online, engage in e-commerce, limit their spending and protect against theft of personal information without needing a bank account. The cards are also popular among young people.
But consumer advocates warn that prepaid cards often carry large fees for basic tasks such as card activation, balance inquiries and cash withdrawals. Advocates encourage people to research any cards before purchase to weigh their advantages against their downsides.
“This is a tool that can be very beneficial for working families in Ohio that have had issues in the banking sector or want a complement to a savings account,” said David Rothstein, project director for asset building with Policy Matters Ohio. “But we just have to make sure that we have a sufficient network so that people can use the cards without it being a money-losing venture for them.”
‘Secure and Convenient’
Prepaid cards are marketed as a “secure and convenient” payment method that allow consumers to shop online, pay bills over the phone or electronically and receive direct deposit without the hassle of maintaining a checking account.
The cards, which often can be reloaded with funds, are sold at retail stores, such as Walmart and CVS, and also at banks and online. Most businesses accept the payments, and consumers can also use them to withdraw cash.
The cards have been around for years, but interest in them is growing.
In 2011, about 13 percent of U.S. consumers used prepaid cards, up from 11 percent the previous year, according to a study by California-based Javelin Strategy & Research.
Prepaid card use grew last year even though ownership of other more traditional financial products — such as credit and debit cards — decreased, according to the study.
Consumers who do not use banks or who are “underbanked” prefer to pay for goods and services using cash, but that is not possible in all situations, said Beth Robertson, director of payments research with Javelin.
People who are underbanked have checking or savings accounts, but largely rely on alternative financial services, such as payday loans, pawn shops and non-bank check cashing businesses.
About 7.1 percent of households in the state, or about 328,000, have no bank accounts, and another 970,140 households are underbanked, according to the Pew Charitable Trusts, citing data from a 2009 study by the Federal Deposit Insurance Corp.
Robertson said prepaid cards give underbanked residents payment flexibility, and her study found that about one in five underbanked consumers owned a prepaid card last year.
“As mobile payments grow, prepaid is another (attractive) option that is available for underbanked consumers to use,” she said.
Option for bad credit
Prepaid cards are also a convenient payment option for people with bad credit who do not qualify for credit cards or who are unable to open a bank account, said James Thurston, communications manager for the Ohio Bankers League.
“If you have gone through problems with defaulting or overdrafts, then it is less likely you will be able to be approved for a credit card or one of those kinds of products,” he said.
Some consumers use prepaid cards when shopping or paying bills online to protect their personal accounts from hackers who scour the Internet in search of information to steal, Thurston said.
Prepaid cards are also popular among young people who lack financial skills and who cannot obtain a credit card because of new eligibility restrictions, Robertson said.
Prepaid cards generally do not allow users to overspend their account balances, which prevents people from going deep into debt and incurring expensive overdraft fees. Some parents buy the cards for their college-aged children to teach them about financial independence.
“Prepaid offers them a lot of flexibility of a credit card — like the ability to make purchases online and not carry cash — but it is not a credit tool,” she said. “Cash-flow control is the biggest advantage.”
But consumer advocates say prepaid cards often have excessive fees for basic activities and transactions, and many cards do not transparently disclose the fees.
Fee structures vary between cards, but they often include charges connected to card activation, balance inquiries, monthly maintenance and calls to customer service with questions, said Rothstein, with Policy Matters Ohio.
Card owners often rack up significant fees when they withdraw cash from out-of-network ATMs, and it can be hard to tell what transactions carry such fees versus those that do not, he said.
“I don’t think everything about prepaid is bad, and I think there is a need for it and a market it makes sense to serve,” he said. “I think the biggest problem is that to some degree the product has come out before the protections and the network are in place.”
Rothstein said people commonly treat prepaid cards as gift cards when they are a completely different product that serve a different purpose.
“Moving people away from (the gift card) mentality is really important,” he said.
A Consumer Reports report released in March said that prepaid card issuers are hoping to take advantage of growing dissatisfaction with the banking sector, but the cards are a “shaky alternative” to bank accounts linked to a debit card.
“Until prepaid card users are guaranteed the same protections that come with traditional debit and credit cards, consumers who use prepaid cards will be at risk of losing all their money, face multiple, high, and sometimes confusing fees, and be offered convenient but very expensive forms of credit associated with the card,” the report said.