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Prepaid Debit Cards are Popular However, they have their own drawbacks.
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Prepaid Debit Cards are Popular but Still Have Downsides
Written by Spencer Tierney Senior Writer | Certificates of deposit ethics, ethical banking, bank deposit accounts Spencer Tierney is a consumer banking writer at NerdWallet. He has covered finances for individuals since the year 2013 with a focus on certificate of deposit and other banking-related issues. He has had his work highlighted in The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. He is based in Berkeley, California.
Aug 10 10, 2016
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Visit an convenience store such as 7-Eleven or CVS Pharmacy and you’re likely to see some pre-paid debit cards hung on the rack.
These cards, used for budgeting or as checking account replacements, are getting more popular. Card purchases made by the top prepaid issuers grew by 15.7 percent in 2014 to 2013 as per The Nilson Report, which analyzes the data of the payment industry.
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Although they are popular they do face many issues. In the past year, both suffered technical glitches which led to cardholders getting locked off their cards for up to seven days. During that time, any funds on these cards, including earnings that were directly deposited onto them, was unavailable. Even in non-shocking situations they have several downsides.
Frequent fee
Prepaid debit cards usually charge you fees for services that you are used to with a checking account, such as free ATM use, customer support, and online and mobile services. And unlike checking accounts, the majority of prepaid cards don’t provide ways to waive their monthly charges.
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Janice Elliot-Howardis an author in Atlanta was the first to get an prepaid card that would charge her a small fee every when she purchased something. When she realized the amount the card was costing her, she quickly canceled it and bought a card that doesn’t charge purchase transaction fees.
She isn’t able to avoid all fees, though.
“The drawback is the ATM surcharge for cash withdrawals], but I do that very rarely,” she says.
One benefit of many credit cards that are prepaid is the fact that they don’t permit overdrafts or have overdraft-related fees. With a checking account, you can get hit with an of around $30 or $35 if you spend more than what the amount you have available on your bank account. However, prepaid cards’ frequent fees for transactions or ATM withdrawals can still be significant.
It’s not always easy to find out the details of your card.
Elizabeth Avery bought a prepaid debit card in a drugstore for an upcoming trip overseas but then realized that the card was not able to be used overseas.
“I notice that the small printing is the area where I’m seeing the issues,” says Avery, creator of the travel website Solo Trekker 4 U and an investment banker for private equity located in Washington, D.C. She was planning to use the card in ATMs across the world to withdraw cash, but discovered no indication on the packaging’s exterior that it was only for domestic use.
It’s not the only information that can be missing.
“The disclosure for prepaid credit cards sold at retail doesn’t need that all the fees need to be disclosed on the outside packaging,” says Thaddeus King who is part of the consumer banking project in the Pew Charitable Trusts in Washington, D.C.
The protections aren’t there yet
Credit cards that are pre-paid, like debit and credit cards are part of payment networks such as Visa as well as MasterCard. In the end, you are protected against fraud for card purchases but they do not have the protections that you get with the bank account.
“When it comes to payment of bills as well as ATM transactions, those are not processed on either the Visa and MasterCard systems,” King says.
Other payment platforms have similar exclusions. For those transactions, King says you must depend on the disclosures provided by your card that may not provide protections , unless they are specifically for purchases.
The debit cards that are prepaid do not have to have insurance from FDIC. Federal Deposit Insurance Corp. Also known as the FDIC, which is how customers can get their money back if their bank or card issuer fails. Although many prepaid issuers offer insurance on a voluntary basis however, their agreements with cardholders may state that the terms can change at any time.
Checking accounts, on the other hand should have greater fraud protection because it protects electronic and ATM transactions. They also have to be protected by the FDIC.
The good news for those who have prepaid debit cards could be coming soon. The Consumer Financial Protection Bureau plans to release its plans later this year, which will extend protection against fraud for these cards in line with the protections for debit and checking accounts.
“Prepaid debit card holders deserve the same protections afforded debit card holders,” says Christina Tetreault, legal counsel at the staff of Consumers Union in San Francisco.
Author bio Spencer Tierney is an expert on deposits and certificates at NerdWallet. He has had his work highlighted by USA Today and the Los Angeles Times.
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