First published Jun 18 2011 01:01AM
Updated Jun 18, 2011 05:40PM
Updated Jun 18, 2011 05:40PM
Rising fees have chased millions of people away from banks and into prepaid debit cards.
In just a handful of years, prepaid cards have become the fastest-growing payment method in the U.S. Just last week, American Express became the first mainstream financial company to offer a prepaid card.
But the cards have problems of their own. Complex fee schedules. Few of the consumer protections afforded to bank and credit card customers. No ability to build credit history.
Regulation » Consumer advocates are raising concerns and demanding more oversight, and at least one state is investigating prepaid card issuers. The Consumer Financial Protection Bureau is expected to step up oversight of the industry when it launches in July.
“People are using prepaid cards as checking accounts, and the government ought to regulate it similarly,” said Suzanne Martindale, staff attorney for Consumers Union, a nonprofit advocacy group that is concerned about unfair prepaid card fees.
Even so, Americans spent $140 billion using prepaid cards in 2009, according to the latest data available from the Federal Reserve. That’s a 21.5 percent increase each year over four years. The amount of money loaded onto the cards is expected to reach $552 billion in 2012 from $330 million three years ago, according to the Mercator Advisory Group, a research firm.
Prepaid cards have gone mainstream by catering to the ranks of the unbanked — people who don’t have a bank account. Nearly one in five Americans are unbanked, a 2009 government report found, and the number is growing.
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Prepaid cards can be used to pay bills or buy merchandise in the same places a bank-issued debit card can be used. So it’s no wonder prepaid is the fastest-growing method of payment over the last five years. This year, the IRS issued tax refunds on prepaid cards to about 600,000 bank account-free households. Social security payments for the unbanked have been loaded onto prepaid cards since 2008. And a growing number of small companies pay employees using the cards. Last Tuesday, American Express joined the fray. The card giant launched a prepaid card in an effort to expand its customer base.
Prepaid motive » Most new prepaid card customers are seeking refuge from new and escalating fees, consumer advocates say. Among them are $3 to print an account summary at a Bank of America ATM; $12 a month for checking accounts with a balances below $1,500 at Chase and Bank of America; overdraft fees of $35 that most banks charge.
“Even the smallest fee can upend the world of people who are functioning on a break-even basis,” said Rachel Schneider, a vice president at the Center for Financial Services Innovation, an organization that works with nonprofit and government groups to look for solutions for the unbanked. “It could mean not having the $2 fare to catch the bus to work.”
Pioneering the push to prepaid cards are companies such as Green Dot Corp., NetSpend Holdings Inc., Mango Financial and SmartyPig. They sell cards mostly through big-box retailers such as Wal-Mart, or at supermarkets and drug stores. The cards come with a Visa or MasterCard logo, and most allow people to use the cards to pay bills online.
Frustrated former bank customers represent a big share of Green Dot’s new customers, said Steve Streit, founder and CEO of the Monrovia, Calif.-based company. The largest of the prepaid card providers, Green Dot has more than 4.3 million cards in circulation, a 230 percent increase from three years ago. Between January and March, $4.6 billion was loaded onto the company’s cards, 62 percent more than the same period last year.
Several $35 overdraft fees over a three month period left Erin Gamboa’s checking account $200 in the red. With her budget too tight to absorb that and other mounting bank fees, the divorced, single mother of two moved her financial life to Green Dot in February. Now, her $850 bimonthly paycheck is deposited directly onto a prepaid debit card. She uses the card to pay for everyday purchases and to pay bills online. She gets a daily text showing her account balance.
“This is just convenient,” Gamboa said.