The Green Sheet Online Edition
September 14, 2009 • Issue 09:09:01
Experts counter prepaid's 'gotchas'
A recent Consumers Union report portrays prepaid cards as fee-laden instruments that drain cardholders of their money and do not offer financial protections afforded other kinds of payment cards. But industry experts counter that the report's author made blanket statements about prepaid cards without differentiating between various types of cards, their functions and their cost effectiveness in comparison to traditional services.
Michelle Jun, Staff Attorney at Consumers Union, the nonprofit publisher of Consumer Reports, said in the report, Prepaid Cards: Second-Tier Bank Account Substitutes, that despite the growing popularity of prepaid cards, consumers face "dangers and traps" when using them.
Based on her research, Jun concluded the main pitfalls of prepaid cards are the "high, multiple and confusing" fees associated with the cards, the lack of proper disclosure by issuers concerning the fees they charge and the lack of safeguards to protect cardholders' money. Among Jun's findings:
- Activation fees can be as high as $29.95, with the median being $10.
- Monthly maintenance fees range up to $10.
- Cash withdrawal fees from ATMs are usually $2.
- Inactivity fees range from $1.50 to $5.95 and can begin after only 60 days of inactivity.
- Overdraft fees from $14.95 to $29 can be assessed.
Additionally, the fees issuers charge are not adequately disclosed, Jun contends. "Consumers can typically find information on only a few of the fees before deciding to sign up, purchase and use prepaid cards," she said. "Retail displays often contain only purchase prices and initial load amounts.
"Consumers who research or purchase cards online will often have to engage in a careful inspection of the prepaid card Web sites to find complete fee information. Access to fee information is often less prominent on prepaid card Web sites than the sign-up pages or registration forms for card purchase."
And when consumers can locate fee information, it is usually displayed in the fine print of cardholder agreements or terms and conditions, she added.
Jun also believes prepaid cardholders are not given the same legal protections as debit card users. She called Visa Inc.'s and MasterCard Worldwide's zero liability policies for prepaid cards "insufficient" and having "significant loopholes."
For example, while debit cardholders have "error resolution rights," which return missing funds to debit accounts within a certain time frame, prepaid card users may not have similar protections and "might be out of all their money due to an unauthorized transaction regardless of how quickly the loss is reported," Jun said.
Finally, Jun takes issue with claims by prepaid card issuers that certain prepaid cards can help consumers build credit histories.
"Although credit-building features may seem attractive to unbanked and underbanked consumers trying to establish credit files or consumers with bad credit trying to rebuild credit, it is not clear whether these nontraditional reporting mechanisms actually help consumers establish good credit and credit scores," she said.
In total, Jun's criticisms of prepaid cards (characterized as "gotchas") make the payment method a "shaky alternative to a bank account with a debit card."
Not so fast
In response to the report, the Center for Financial Services Innovation, an unbanked consumer advocacy organization, said its research has shown that if consumers choose the right prepaid cards for their needs, they represent a "far better deal" in terms of fees than other payment methods, such as employing check cashers to cash checks.
Louis Hoch, Chairman and Chief Executive Officer at prepaid card issuer and program manager FiCentive Inc., agrees with the CFSI, but goes a step further in his criticism of the Consumers Union report. "The main problem of the report is [Jun] isn't equating value received," he said. He offered several examples to illustrate his point.
Hoch said the bank fees plus ATM fees charged consumers with low-balance bank accounts are higher than the fees on prepaid cards.
Similarly, consumers who cash their paychecks at check cashers are charged 2 percent of the checks' face value plus a fee; in comparison, it is cheaper to "have a prepaid card with direct deposit and use a bank cash advance or ATM withdrawal," he said.
Jun's report doesn't compare the costs of using prepaid cards to the costs of the alternatives. "If I'm doing something today as an individual that is costing me $100 a month, and I shift whatever that I'm doing to some new process that is costing me $50 a month, maybe $50 a month looks too high for you if you look at it just by itself, but I've just saved $50," Hoch said. "So the whole value argument is not fair at all."
Furthermore, Hoch argued that Jun unfairly lumped prepaid cards into one category. "She is making all prepaid cards sound like they're equal, and they're not," he said. "There are many different uses of prepaid cards. There's payroll card programs that typically have very little fees associated with them. And there's laws associated with payroll cards that allow people to get their pay for free."
On the other hand, gift cards, general spending cards, teen cards and so forth are marketed differently than payroll cards and have different functions as well; therefore, different types of cards have different types of fees, Hoch said.
Additionally, he claimed Jun's contention that prepaid card fees are not properly disclosed is "totally wrong."
"Every respectable bank - Meta Bank, Bankcorp, Key Bank - the big banks that issue prepaid, they make sure that everybody, like FiCentive, properly identifies all the fees," he said. "I can tell you that FiCentive, all of our cards, our fees are printed right with the card carrier. And I think the majority of issuers do that as well."
And to Jun's claim that prepaid cards users do not have the same consumer protections as credit and debit card users, Hoch argued it's not the case. While gift cards and incentive cards are not insured by the Federal Deposit Insurance Corp., payroll cards and general use cards are, he said.
However, Hoch agrees with Jun that prepaid cards are not good credit-building mechanisms. "When some people in our industry are saying it improves your credit, I don't know how they get there," he said. "It's a real stretch."
On a positive note, the CFSI is heartened by the Consumers Union report as an "important sign that the prepaid industry is getting traction and gaining momentum."
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