As the market for prepaid debit cards has exploded, so too have complaints from consumers. Getting refunds after fraud incidents takes too long, setting the cards up can be a hassle, fees can be obscure, and issuers are too quick to shut the cards down when there’s a dispute, users tell regulators, according to a recent report by the Consumer Financial Protection Bureau.
Still, prepaid cards are exploding in popularity. The St. Louis Fed says they are the fastest growing form of non-cash payments in the U.S., outpacing high-tech payments like mobile phone wallets. So-called general purpose reloadable cards — which function much like debit cards attached to checking accounts — have grown from a $1 billion market in 2003 to an expected $112 billion in 2018, according to CFPB Director Richard Cordray.
The agency issued a sweeping set of new consumer protections for prepaid cards this month after years of study, essentially bringing rules governing their use into line with traditional credit and debit card protections.
The cards are a critical lifeline into the modern marketplace for the 7% of Americans known as “unbanked” who cannot access traditional checking and savings accounts.
About 2.6% of the total U.S. population doesn’t have a traditional bank account but carries a prepaid card, according to a report from The Pew Charitable Trusts. But they aren’t just for the unbanked. Those earning less than $25,000 a year are almost as likely to have one.
The fast growth and subsequent rise of complaints drove the CFPB to set up new rules.
“Our new rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone,” Cordray said in a statement. “These important new protections fill gaps in the law for consumers. The rapidly growing ranks of prepaid users deserve a safe place to store their money and a practical way to carry out their financial transactions.”
In its monthly release of complaint data, the CFPB said the most common gripe consumers had about prepaid cards involved opening and closing accounts.
Traditional credit card users are familiar with the process of disputing transactions, which usually only takes a moment or two. But prepaid users sometimes find prepaid card issuers immediately cancel their cards when a dispute is filed, leaving them without access to funds — or ATMs or online shopping. Sometimes, consumers spend days waiting for replacements, the CFPB said.
Complaints about opening accounts were serious as well.
“Often consumers complain that their purchases were declined and when they contacted the company they were asked to submit validating documentation,” the report said. “This documentation was frequently not in their possession and difficult to obtain.”
Requests can include demands for original receipts and card packaging, the CFPB said.
While consumers who complain about traditional debit card fraud must be granted “provisional credits” to their checking accounts if bank investigations take more than a few days, prepaid card users have complained about extended delays in accessing their money after fraud complaints, the CFPB said.
In the past year, the biggest spike in complaints came from Rhode Island, West Virginia and New Hampshire, the CFPB said.
The new consumer protection rules rolled out this month aim to help. Prepaid issuers must now grant provisional credit during investigations, for example, and fee schedules must be clear. The rules also grant consumers the following, per the CFPB:
Free and easy access to account information: Financial institutions must make certain account information available for free by telephone, online, and in writing upon request, unless they provide periodic statements. Unlike checking account customers, prepaid consumers typically do not receive periodic statements by mail. The rule ensures that consumers have access to their account balances, their transaction history, and the fees they’ve been charged.
Error resolution rights: Financial institutions must cooperate with consumers who find unauthorized or fraudulent charges, or other errors, on their accounts to investigate and resolve these incidents in a timely way, and where appropriate, restore missing funds. If the financial institution cannot do so within a certain period of time, it will generally be required to provisionally credit the disputed amount to the consumer while it finishes its investigation.
Protections for lost cards and unauthorized transactions: The new rule protects consumers against withdrawals, purchases, or other unauthorized transactions if their prepaid cards are lost or stolen. The rule limits consumers’ liability for unauthorized charges and creates a timely way for them to get their money back. As long as the consumer promptly notifies their financial institution, the consumer’s responsibility for unauthorized charges will be limited to $50.
Remember, prepaid debit cards won’t help you build credit. If that’s your aim, it may be a good idea to look into a secured credit card, which requires you to put down a cash deposit that serves as your credit line. Just make sure the card issuer reports your use to the three major credit bureaus before filling out an application. You can track your progress toward building good credit by viewing your free credit report snapshot, updated every 14 days, on Credit.com.
Image: Martin Dimitrov