Consumers Union Report: Prepaid Cards Come With Long List of Fees and Weak Consumer Protections

/PRNewswire/ -- Prepaid cards continue to grow in popularity, but this new form of plastic payment comes with high fees and weaker protections than those offered by traditional debit or credit cards, according to a new report by Consumers Union, the nonprofit publisher of Consumer Reports.

Prepaid cards are reloadable cards that can be used to make payments similar to debit cards and are becoming the foundation of a second tier banking system used by a growing number of low income consumers.

"Prepaid cards come with a long list of fees that are often hidden deep in the fine print," said Michelle Jun, Staff Attorney for Consumers Union. "Consumers considering prepaid cards should be aware that those fees can add up quickly and that they may be vulnerable to losing their money if their card is lost or stolen."

Prepaid cards are a growing business and usually bear a network logo such as Visa or MasterCard and often have the word "debit" printed prominently on the front of the cards. The Federal Reserve estimated that 312 million transactions were made with prepaid cards in 2006 for a total value of $13.3 billion. These numbers have undoubtedly continued to rise as the prepaid card industry has worked to enroll the millions of unbanked and underbanked consumers.

Consumers Union reviewed the terms and conditions of 19 different prepaid cards and found that consumers face multiple fees and other costly "gotchas":

-- Activation Fees: 12 of the 19 prepaid cards reviewed charged
consumers a fee for activating their cards. These activation fees
ranged from a low of $3 for the Walmart Money card and the nFinanSe
card to a whopping $39.95 for the First Vineyard card.
-- Monthly Fee: 16 of the 19 prepaid cards charged monthly fees ranging
from $2.95 per month for the nFinanSe card to $9.95 per month for the
NetSpend VISA card, Rush card, and AccountNow card. Most prepaid card
issuers will waive the monthly fee if a direct deposit is set up.
Some card issuers will waive the monthly fee if the consumer chooses
the "pay as you go" option. The Green Dot card charges a $5.95
monthly fee unless the consumer maintains a $1,000 balance or has 30
posted transactions.
-- Fees to Get Cash: All 19 prepaid cards reviewed charged fees for
withdrawing cash from ATMs in the U.S. On the low end, consumers
using the nFinanSe card are charged 99 cents per withdrawal.
Consumers using the NetSpend Visa card, AccountNow card, and Bank
Freedom card are charged $2.50 for each withdrawal. In one case (Rush
card), consumers were given two free withdrawals but then charged
$2.50 for each additional withdrawal. Consumers using the Green Dot
card get free withdrawals at in-network ATMs, but are otherwise
charged $2.50 per withdrawal. Fees were even higher for international
withdrawals.
-- Balance Inquiry Fees: 18 of the 19 prepaid cards charged fees for
checking balances at ATMs, ranging from 45 cents to $1. This does not
include any additional fee charged by the ATM owner.
-- Paper Statement Fees: 15 of the 19 prepaid cards charged fees for
providing consumers with a paper statement detailing transactions on
their account. Paper statement fees ranged from $1 to $5.95. All 19
prepaid card issuers provide free access to account statements online.
-- Customer Service: Most pre-paid card issuers provide free customer
service, but consumers using the BuyRight card will be charged $1 to
speak to a customer service representative, while users of the Exact
card will pay $3.95 for doing so. Some prepaid card issuers charge
customer service fees after a limited number of free calls.
-- Fees for Inactivity: 9 of the 19 prepaid cards charged fees when
cards are not used after a certain period of time. These dormancy
fees range from $1.95 per month for the Rush Card (after 90 days of
inactivity) to $9.95 per month for the Exact card.
-- Overdraft Fees: A number of prepaid card issuers claim that they do
not charge fees when users spend more than the available amount on
their cards. However, Consumers Union found that 13 of the 19 cards
it reviewed included overdraft or "shortage" fees. Most of the card
issuers that charge an overdraft fee do not specify the amount of the
fee. Instead, the card agreement indicates that consumers will be
charged "applicable fees" for the shortage.


When prepaid cards are lost or stolen and used by others to make fraudulent transactions, consumers are not protected by the same regulatory and statutory safeguards that enable other debit card users to recover their money. If a consumer contacts a card issuer about a lost or stolen debit card within two business days, the consumer's liability is limited to up to $50 (or up to $500 if the consumer reports the debit card lost or stolen after two business days). By contrast, prepaid cards may only have voluntary protections that could be revised or rescinded at any time for any reason.

Some prepaid cards claim to provide consumers a way to build a credit record or include a credit line feature. However, Consumers Union found that the prepaid card issuers may report "credit building" activity to an alternative, less used credit reporting agency or may report only the payment of the card's high monthly fees. The credit line feature may provide credit which is as expensive as costly overdraft loans and payday loans.

Finally, consumers with traditional bank accounts have peace of mind that their money will not be lost as long as their bank is FDIC insured. But consumers who use prepaid cards have no guarantee that they will be able to recover all their money in the event of a bank failure because the funds may not be insured by the FDIC.

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FDIC Urges Stronger Debit Card and Overdraft Oversight; Other Bank Regulators Should Take Action

/PRNewswire/ -- Statement of CRL president Michael D. Calhoun: "American families, especially those most vulnerable financially, could save millions of dollars a year in costly overdraft fees if guidelines the FDIC proposed today are adopted. The guidelines would encourage the banks the FDIC oversees to offer customers lower-cost overdraft alternatives rather than charge unlimited high-cost overdraft fees--as many banks do, even on small debit card transactions.

Under the proposal, a bank would contact a customer who incurs six overdraft fees within 12 months and offer--and explain--less costly options. The bank would be encouraged to provide the customer with a reasonable opportunity to choose one of them. Banks the FDIC oversees also would be discouraged from re-ordering transactions to maximize overdraft fees.

Banks and credit unions frequently promote their most expensive form of overdraft coverage, which typically imposes a $34 fee per overdraft--twice the amount of the typical debit card purchase that triggers an overdraft--rather than reasonably priced options like a low-interest line of credit or an affordable small-dollar loan. Financial institutions earn $24 billion annually from these high-cost programs.

The proposal comes just days before new Federal Reserve's August 15th rules take effect requiring banks and credit unions to obtain a customer's signature before enrolling them in a costly overdraft program for debit cards. But many banks don't give consumers real choices among alternatives; instead, they steer customers into the highest cost overdraft coverage they offer. The FDIC's proposed guidance indicates the Fed's rule is not sufficient to stop unfair and abusive overdraft practices by lenders: The Fed addresses neither the size of the fees nor how many can be charged.

A decade ago, most banks declined debit card transactions, and at no charge, when a customer's account lacked sufficient funds. Citibank has never charged overdraft fees on debit cards, and Bank of America is stopping the practice. But another big bank, Wells Fargo, continues to charge over a billion dollars a year in debit card overdraft fees. Wells also continues to market a cash advance product that, like payday lending, carries triple-digit annual interest rates.

To comprehensively address abusive short-term loan products, including unfair overdraft practices, the Federal Reserve and the Office of the Comptroller of the Currency must join the FDIC's efforts and explicitly limit overdraft fees to no more than six per year. In addition, all regulators should require that the size of the overdraft fee reflect a lender's cost and risk, and they should ban the manipulation of transaction postings."

For CRL's research on banks' overdraft marketing efforts, see http://www.responsiblelending.org/overdraft-loans/research-analysis/banks-targ et-mislead-consumers-as-overdraft-deadline-nears.html.

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Treasury Department Proposes End to Checks for Federal Benefits

/PRNewswire/ -- Under new regulations proposed by the Treasury Department, Americans who receive federal benefits like monthly Social Security and Supplemental Security income will no longer be able to get these funds by check. Instead, beneficiaries will have to switch to electronic payments, either by having funds deposited directly into their accounts or onto a prepaid debit card issued by the government.

In comments filed with the Treasury Department, Consumers Union urged the agency to allow consumers to continue receiving their benefits by check and to limit the fees and improve the customer service associated with the Direct Express prepaid card for those consumers who choose this option.

"Electronic payments are not safer, easier, and more convenient than checks for all types of benefit recipients," said Michelle Jun, Staff Attorney for Consumers Union, the nonprofit publisher of Consumer Reports. "Consumers should be able to choose the option that is best for them, including paper checks. And if the government is going to encourage benefit recipients to use prepaid cards, it should do more to limit the fees charged for using them and make them easier to use."

The Treasury Department has received numerous comments from consumers who have raised concerns about the switch to electronic payments. Those comments and Consumers Union's concerns are summarized in the letter linked below:

http://www.defendyourdollars.org/FINALCmt31CFR208_8.9.10.pdf

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Bankers Mislead, Cajole Customers on Overdraft Fees as Opt-In Deadline Nears

/PRNewswire/ -- As the August 15th deadline nears for bank and credit union customers to opt in to high-cost overdraft programs, a new CRL analysis finds these firms market most aggressively and often misleadingly to their most vulnerable customers. Banks target these customers because they likely live on the edge financially and therefore are most likely to repeatedly overdraw accounts. To induce these customers to accept overdraft coverage, many marketing campaigns use scare tactics or incomplete information. For example, they fail to emphasize customers can have debit card transactions declined at no cost rather than incur a $34 overdraft fee. [For the full report, go to http://www.responsiblelending.org/overdraft-loans/research-analysis/banks-targ et-mislead-consumers-as-overdraft-deadline-nears.html.]

CRL's report includes:

-- Bank consultant pitches on pinpointing customers who will overdraft
most.
-- Evidence these customers are likely to be low-income, single,
nonwhite.
-- A cost comparison of overdraft programs.


Under new federal rules, banks must obtain explicit consent from existing customers by the 15th before enrolling them in a costly overdraft program for debit cards. Banks have had to obtain consent from new customers since July 1. These opt-in rules provide a first-line defense against high-cost overdraft fees, but the Federal Reserve Board and, eventually, the new Consumer Financial Protection Bureau must end all unfair overdraft practices, especially those that disproportionately hurt the most vulnerable.

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