Editorial Policy

Prepaid Card Users Experiencing Sticker Shock

Marcia Frellick

April 18, 2012

As Americans’ appetite for prepaid debit cards grows,  many new prepaid converts are in for a shock when they discover the fees involved, a survey from Pew Health Group’s Financial Security Portfolio has found.
Turning to prepaid
In 2009, consumers loaded $28.6 billion onto prepaid cards, according to Mercator Advisory Group numbers cited by Pew. By 2013, that figure is expected to reach nearly $202 billion.
The Pew Health Group wanted to understand what’s feeding the cards’ popularity, so it put some questions to focus groups in Chicago and Houston in November 2011. Researchers released the responses on April 11, 2012 — and they show that consumers see the cards as a way to avoid overdraft fees and to keep themselves out of debt. After all, you can spend only the amount you load onto the card. Consumers also see prepaid cards as a safe place to keep their money.
Turned off by prepaid
Survey participants’ answers also revealed that many aren’t aware of the fees that can drain a prepaid card’s balance. Some of these fees include activation fees, monthly fees, reloading fees, replacement fees and ATM fees.
One woman from Chicago was taken aback when she realized the call she was making to customer service about her prepaid card would end up costing her.
Here’s how she described the call in the survey:
“It was like, ‘Ma’am, you get charged for calling customer service.’ ‘I’m getting charged now for calling you all about the money that I got charged?’ She was like, ‘Yes, I’m sorry.’ I was like, ‘The next time I load my card, I have to pay for the fees that you charge me for talking to you right now?’ ‘Yes.’ ‘OK. ’Bye.’ ”
When participants knew about the fees, they complained about the number of them. Yet many still preferred prepaid card fees to banks’ overdraft fees.
“I don’t like the fees on prepaid debit cards,” a female participant in Chicago said.
“…but I’d prefer to pay the $3.95 [to reload the card] than have to deal with the things that I know that people go through with their checking accounts.”
Other surprises
Pew also found that most people assume incorrectly that the federal government provides oversight for prepaid cards. They are also unaware of consumer protection gaps — such as the lack of Federal Deposit Insurance Corporation (FDIC) coverage on some cards, which means you could lose the amount on the card if the company goes belly up. Most were also unaware there are no federal requirements for fee disclosure as there are for banks and credit unions.
The survey also turned up a surprising lack of comparison shopping, even though prepaid cards vary substantially in what they offer and what fees they charge. Most picked whichever one was convenient or recommended to them.
One male participant from Chicago said, “My cousin actually picked [my card]. I don’t know why, but that’s the one that she chose and told me to buy.”