Are Prepaid Cards Taking Over the World?

The Consumer Financial Protection Bureau (CFPB) announced recently that it’s taking a look at regulating the prepaid card industry. This decision has come at a really good time. Although these cards were originally targeted at the unbanked, now the whole world seems to be the target market.

There are a few reasons why we’re turning into a prepaid nation right now. Part of the reason that major banks, such as Chase, are getting involved, is that regulation limited the profits on debit card swipe fees, so they’re looking for other opportunities to bring in money. But beyond that, many issuers have simply realized that these cards are money makers. Even colleges see the value. According to this study released this week by U.S. Public Interest Group Higher Education Fund (U.S. PIRG), as many as 900 colleges, in partnerships with banks, are encouraging students to use prepaid cards.

What I also find interesting is how slick the marketing has gotten. The celeb-issued cards offer a cool factor. Facebook is even getting into the act and offering a FarmVille-branded American Express prepaid card. Gamers can load funds onto the card and when they use it, they get rewards to buy FarmVille stuff. American Express offers one of the least expensive prepaid cards out there, but it’s still not free.

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To add to the confusion about what exactly these cards really offer, a major media outlet recently referred to these cards as “prepaid credit cards.” This whole thing is confusing enough without creating the impression that these cards are actually credit cards, too. And by the way, you do not build credit with a prepaid card because you’re spending your own money.

Anyway, the point here is that prepaid cards are everywhere. So at this time, all that matters is educating and protecting consumers. So thanks to the CFPB for having our backs. Now having said that, regulating an industry can cause unintended negative consequences so the CFPB is walking a fine line. But I get the impression that Cordray knows this and will proceed with care.

Okay, so here’s what I suggest to steady the ship without making things worse for the consumers who really have no other option:

Require a standard Schumer-type box for all fees. Some of the better prepaid cards are already presenting their fees in one place. But there are many issuers out there that take fine print to a new level. I’ve seen fine print sideways. I’m not kidding.

Let’s get all the fees out in the open so consumers can make a smart choice. Those inactivity fees hidden on page 12 of the disclosure statements? In the box! And make the box standard in appearance so consumers know what to look for.

Take a hard look at the “out there” fees. Okay, I understand that banks are in business to make money and I’m fine with that. But there are some fees on these cards that are too crazy to tolerate.

The CFPB can’t eliminate all of them, but I hope it takes a look at some of the wilder fees, such as inactivity fees, excessive activation fees, $25 to withdraw cash at a bank counter, $25 check processing fees, and so on. All I’m suggesting is that some of the fees out there need to be reviewed–and at the very least–be explained to consumers in clear language.

Review the relationships between colleges and banks. I’m thinking a Credit CARD Act type of move here. Aren’t college students in enough debt without making them pay to use their own money? I mentioned the U.S. PIRG study earlier, which also says that student financial aid funds that are put on these cards are subject to convenience fees if used at an ATM. I’m sorry, but there’s something really wrong about this.

Take a look at consumer protections offered by prepaid cards. Some prepaid cards offer consumer protections, but many do not. Similarly, some prepaid cards are FDIC-insured, but some are not. I’d like to see the CFPB at least take a look at making funds in prepaid accounts FDIC-insured. For now, your only option is to read the fine print twice so you know what protections you have, if any. And if the fine print is sideways, you’d better read it three times.

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Image: apbeatty, via Flickr