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To Learn More About Prepaid Cards, Try The 'Ask CFPB' Service

Logo for Consumer Financial Protection Bureau Last year, the Consumer Financial Protection Bureau (CFPB) launched its "Ask CFPB" service with answers to frequent questions by consumers. I visited the website to see what it said about prepaid cards.

The Prepaid Cards section of Ask CFPB provides basic answers to these and other key questions:

  • What is a prepaid card?
  • What is a payroll card?
  • What is the difference between a debit card and a prepaid debit card?
  • What are some of the main types of prepaid cards?
  • If my employer offers me a payroll card, do I have to accept it?

Some prepaid cards are "closed-loop" and some are "open-loop." For example, gift cards from Dunkin' Donuts, The Old Spaghetti Factory, Starbucks, or Barnes & Noble are closed-loop cards -- usable only at each retailer's stores. Open-loop prepaid cards (GPR) can be used in many retail stores, like traditional debit cards and credit cards. The prepaid cards for some public transit systems (e.g., subways, buses, commuter trains) are closed-loop, and others are open-loop. Another example, when its prepaid features are activated the AAA Prepaid Card is an open-loop card. It's important for consumers to remember that while open-loop GPR prepaid cards may look like traditional debit cards, they aren't because of the different regulations, disclosures, and rights for consumers.

You can browse on your own the answers about prepaid cards at the "Ask CFPB" website, so I won't repeat the answers here. If you have a problem, you can submit a complaint at the CFPB website. However, if you want to know more than the basic answers, keep reading.

Consumers should know that prepaid cards are huge revenue generators for banks and card issuers. The cards represent a fast-growth opportunity, as the CFPB highlighted in a 2012 announcement:

"According to a 2009 FDIC study, 9.7 percent of all households used these prepaid cards. Mercator Advisory Group reports that the prepaid market totals $57 billion and is expected to grow at a rate of 42 percent per year from 2010-2014. The two largest prepaid card program managers have reported a jump from 3.4 million active cards in 2009 to over 7 million this year. It is projected that the total dollar amount loaded onto prepaid cards will hit $167 billion in 2014... The largest prepaid card program manager in the United States reported that funds directly deposited onto its prepaid cards increased by nearly 70 percent from 2010 to 2011..."

In 2012, the CFPB noted some of the key issues about some prepaid cards (bold emphasis added):

"Fees and Terms Disclosure: The lack of an industry-wide standard on prepaid card fee disclosure may make it difficult for consumers to understand the cost of the product or compare fees. Often, consumers do not know what protections or fees come along with their prepaid cards prior to purchase because such disclosures are contained inside the packaging... Consumers should also know whether or not their funds are protected by FDIC insurance..."

"Unauthorized Transactions: Federal regulations require that credit and debit card issuers limit consumers’ liability when their cards are used without their authorization. These regulations do not extend to prepaid cards. Many prepaid card issuers voluntarily offer this protection, but it is not standard across the industry..."

"Product Features: Most prepaid cards do not offer any credit features. In general, cardholders may not be able to withdraw or spend more than the funds loaded on their cards. However, some prepaid cards allow their cardholders to overdraw their accounts, and some offer small-dollar loans or a line of credit. Similarly, very few prepaid cards have a savings account. Even though such savings accounts typically have high interest rates, consumers do not seem to take advantage of the opportunity to save. Another feature is that of credit repair, which claims to offer consumers the opportunity to improve or build credit..."

To better understand GPR prepaid cards, I also read the CFPB's "2012 Advanced Notice on Proposed Rulemaking" (a/k/a ANPR - Adobe PDF) document:

"... Some [prepaid] cards are “closed-loop cards,” which a consumer can use only at a specific merchant or group of merchants. Other cards are "open-loop cards," which a consumer can use anywhere that accepts payment from a retail electronic payments network, such as Visa, MasterCard, American Express, or Discover..."

The ANPR document explained:

"Many, but not all, GPR card accounts are insured by Federal Deposit Insurance Corporation (FDIC) pass-through insurance (coverage that "passes through" the agent to the holders of the accounts). Other GPR cards may provide alternative security mechanisms, but do not offer FDIC pass-through insurance..."

Why buy a prepaid card without that protection for your money? If you didn't know before, you know now to shop for GPR prepaid cards with that protection. And, I bet you will, provided the prepaid card's exterior packaging includes these disclosures. Obviously, a GPR prepaid card with FDIC insurance protections is more valuable than a card without that protection. Wise consumers want their money protected.

Last week, the CFPB announced:

"We are also expecting to build on an Advance Notice of Proposed Rulemaking that we published last year concerning prepaid cards, by developing a proposed rule to strengthen federal consumer protections for these products."

I look forward to reading later this year the CFPB's updated rules about prepaid cards, even though the agency did not seek feedback in 2012 about (closed-loop) gift cards, payroll prepaid cards, and electronic benefits transfer (EBT) prepaid cards. Given recent news stories about payroll prepaid cards, consumers need improved disclosures to avoid losing choice and getting "mugged" with undisclosed fees.

Many consumers consider switching to GPR prepaid cards to avoid overdraft fees with debit cards attached to traditional checking accounts. Is this wise? Only you can decide for yourself as you know your lifestyle and finances best. Do your research first.

Wise consumers understand their rights and responsibilities before buying any prepaid card. It is wise to shop around and compare first, so you don't get "mugged" by other fees. Both CNN Money and Consumer Reports found a wide variety of fees when it investigated prepaid cards: activation fees, monthly fees, reload fees, cash withdrawal fees, inactivity fees, online payment fees, paper statement fees, customer service phone call fees, and more.

If you need to build your credit history, then a prepaid card may not be right for you. Wise consumers do the research first to determine whether a prepaid card fits your lifestyle and spending habits. Read this FDIC comparison between debit cards, credit cards, and prepaid cards. For me, a GPR prepaid card does not meet my needs. I don't buy nor use GPR prepaid cards, unless they are a gift from a family member or friend.

To learn more, this blog offers several related articles:

What's your opinion of prepaid cards?


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