Prepaid Cards: Promise and Pitfalls for Consumers

Prepaid cards are credit card–sized pieces of plastic that provide access to a preloaded amount of money. Unlike traditional credit or debit cards that derive their value from a line of credit or an existing bank account, the value of a prepaid card comes from money given to the card’s issuer prior to its use.  The use of general purpose reloadable (GPR) prepaid cards has steadily increased in the past decade.  These cards are increasingly being used by all levels of government to distribute a variety of benefits to those who do not have bank accounts.

Advertisers market GPR prepaid cards as providing low-income consumers with a convenient and cost-effective alternative to using basic checking accounts.  However, consumer advocates note that these cards can be expensive for consumers to use and lack key consumer protections typically associated with mainstream financial products.  This paper by Neal Walters of the Public Policy Institute Consumer and State Affairs Team explores the potential benefits and drawbacks of using GPR cards and offers key design principles to protect consumers who use these types of cards.  

The report’s key findings are: 

Prepaid general-purpose cards have become increasingly common, with $60.42 billion loaded on such cards in 2008, up 54.3 percent from $39.16 billion in 2007.

GPR cards mimic many features of a traditional checking account.  As such, these cards appeal to low-income unbanked consumers who use the cards in lieu of a bank account.

GPR cards have the potential to provide a number of benefits to cardholders.  For example, GPR cards have the potential to be cheaper to use than check cashers and money orders.  In addition, GPR cards are versatile and convenient for consumers to use, and can provide greater protection to consumers than carrying and using cash. 

However, there are several concerns about the use of GPR cards.  For instance, GPR cards can carry an expansive array of fees and can be an expensive alternative to basic checking accounts.  Also, there is a lack of regulation of GPR products as well as a lack of a standardized means to disclose fees and terms of service to consumers.  In addition, some GPR cards allow for direct deposit account advances that amount to high-cost loans.

The report recommends a number of recommended policy options:

• Expand the Electronic Funds Transfer Act and Regulation E to include all GPR cards.

• Issuing banks for GPR cards should be required to meet FDIC “pass-through” requirements when establishing the aggregate account to ensure that all cardholders receive the full protection of FDIC insurance on the funds they have deposited.

• Develop a standardized disclosure form to allow consumers to identify and understand all fees and key terms of service prior to purchasing or using a GPR card.

• Prohibit overdraft or shortage fees.

• Prohibit direct deposit account advances with high fees.

• Employers and government agencies who distribute GPR cards should negotiate the best possible deal on behalf of the card recipients.