Pre-paid Cards Enter the Credit Market, Thwarting the Primary Impetus for Using the Cards

A while back, The PEW Charitable Trust did two fascinating papers, found here and here, on prepaid cards. The studies reported that nearly 12 million consumers loaded more than $64 billion onto prepaid cards in 2012, and that three of the top 10 companies now offering prepaid cards are highly recognizable banking institutions that did not offer the product before. This is a big change. Indeed, we here at credit slips do not even have a category for stories on pre-paid cards, but the cards are the next big thing. Since these reports came out, I have seen numerous conferences advertised to help people learn more about how to make money issuing pre-paid cards. The business plan for making more money from a seemingly simple payment device? Offering overdraft “protection” for the cards, meaning that if the money is gone, the card holder can just overdraw the pre-paid card…for a few bucks of course. Hmmm…

Pew found that the primary reason customers use pre-paid cards is because they want to avoid going into debt. Pre-paid cards help with this goal because when the money on the card is gone, it’s gone.  Except not anymore, necessarily. A little routing around on the web led to some interesting facts. While the biggest pre-paid card issuers do not have the “protection,” some of the other very large market players do. For example, Netspend, a big market player. Netspend charges $15 per overdraft and offers this service only to their direct deposit customers. The link  is here, but my understanding is that the overdrafts can only be small. The highest allowed would be for $85. The overdraft amounts plus fees can never exceed a total of $100 per pay period. So you can overdraft once for up to $85 for a fee of $15, or twice up to a total of $70 for a fee of $30 ($15 twice), or up to three times for a total of $55, for a fee total of $45 ($15 three times). The overdraft is secured by the customer’s next direct deposit onto their Netspend card, and is deducted when that direct deposit comes in. Not cheap credit in any case.

Some other companies’ rules are harder to figure out. For example, for AccountNow and RushCard, the web sites says there are no overdraft fees but the cardholder agreement says there are fees. The fee amounts are not disclosed.  ACE Elite Credit Card also  charges a $15 fee for transactions that overdraw account by more than $10 up to a maximum of three times per year. A few cards seems to offer overdraft protection with no fee, such as Webster Visa Prepaid Card , the BBVA Compass prepaid , and even the Occupy Wall Street Prepaid Card, but remember, the point of using the card is NOT to overdraw. Bottom line? Consumers will now begin to spend thouands on pre-paid card fees, like they have on checking fees, even though the cards are designed to keep consumers out of that loop.

 As a result of these trends, Pew recommends that the CFPB issue these rules for prepaid cards:

    Prepaid cards should not have overdraft or other automated or linked credit features.

    Prepaid cardholders should be protected against liability for unauthorized transactions that occur     either when a card is lost or stolen or a charge is incorrectly applied.

    Prepaid cardholders should have access to account information and transaction history.

    Prepaid cards should be required to provide information about terms, conditions, and fees in a     uniform, concise, and easy-to-read format. This information should be included with the card     packaging so that it is  accessible pre-purchase at retail outlets as well as online.

    Prepaid card funds should be federally insured against loss caused by the failure of an institution.

    Predispute binding arbitration clauses in cardholder agreements, which prevent cardholders     from having the choice to challenge unfair and deceptive practices or other legal violations in     court, should be prohibited.

While none of the other big prepaid card issuers (besides Netspend) have started offering overdraft "protection," if the CFPB prepaid rules permit overdraft and credit on prepaid cards, it is likely that other providers will begin to offerthis feature as well. That would be a negative development because so many prepaid customers have had trouble with checking account overdrafts in the first place, which is one of the main reasons they got a prepaid card.

Comments

[Adam Levitin]

Prepaid is growing, but it's still pretty small. To compare using 2012 statistics:

Prepaid loads (not all of which are spent): $64 billion
Debit card spending (MC/V only): $1.55 trillion
Credit card spending (MC/V/Amex/Disc): $2.21 trillion

What's interesting about prepaid is how it can function as an ersatz bank account without the overhead costs of a brick and mortar banking operation. That has real possibilities for the unbanked/underbanked, as a prepaid card enables both the safe-keeping and the payments functions of retail banking.