Buying a prepaid debit card these days is just about as easy as picking up a bottle of shampoo or a candy bar. Walk into a Wal-Mart or almost any major drugstore, and rows of plastic worth $25, $100 and even $500 beckon from kiosks alongside prepaid phone cards and gift cards for retailers.
“No Credit Check. Safer Than Cash. No Bank Account Needed,” says the Green Dot Visa Prepaid Card: Just pay at the register and the card is ready for ATM withdrawals, store purchases and online shopping.
For many people who do not have bank accounts, or cannot get a credit card, the appeal is irresistible, making the reloadable cards among the consumer banking industry’s fastest-growing products. But their convenience comes with a catch: fees, often hidden in the fine print.
The MiCash Prepaid MasterCard docks cardholders a $9.95 activation fee. Like many competitors, it then charges numerous recurring fees, including $1.75 for each ATM withdrawal, $1 for each ATM balance inquiry, 50 cents for each purchase, $4 for monthly maintenance, $2 for inactivity after 60 days and $1 for a call to customer service.
“It’s a very expensive way to bank,” said Jean Ann Fox, director of financial services at the Consumer Federation of America.
A cottage industry only 10 years ago, reloadable prepaid cards have tapped into the vast pool of about 80 million consumers who have little or no access to bank accounts. The market includes college students who do not want to carry around wads of cash and consumers who do not want to type their credit card number into the Internet.
More typically, it comprises low-income people and immigrants who have fewer financial options than other Americans. Often, they turn to these cards because they cannot open a bank account, or they become fed up with the costs of check-cashing stores or overdraft fees on checking accounts.
Industry officials say the cards are a good deal because users can avoid the fees charged on low-balance bank accounts and at check-cashing stores.
“If you look at these products today compared to even a checking account, many consumers have found that they can be far less expensive,” said Gary Palmer, chairman of the Network Branded Prepaid Card Association.
But even as the industry expands, many prepaid cards continue to charge fees — including for purchases and paying bills — that can quickly accumulate.
Because it is a relatively new industry, prepaid cards have not undergone the Congressional and regulatory scrutiny of credit and debit cards. In the spring, lawmakers restricted interest rate increases and hidden fees on credit cards, and regulators are now examining stricter rules on overdraft fees on checking accounts. Even gift cards, which expire when the money runs out, will soon be subject to new rules limiting monthly fees and expiration dates.
Congress has asked regulators to determine if prepaid cards warrant the same protections extended to debit and credit cards. The industry’s trade association says such measures are unnecessary and would make cards more expensive.