Prepaid Debit Cards are Popular but Still Have Downsides

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Prepaid debit cards are popular However, they have their own drawbacks.

by Spencer Tierney Senior Writer | Certificates of Deposit ethics, ethical banking, bank deposits Spencer Tierney is a consumer banker at NerdWallet. He has written about the personal financial sector since with a particular focus on certificates of deposit, as well as other banking issues. His work has been featured in The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. The location of his work is Berkeley, California.

Aug 10 10, 2016

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Visit one of the convenience stores like 7-Eleven or CVS Pharmacy and you’re likely to see a few pre-paid debit cards hung on the rack.

They are also employed for budgeting and as checking account replacements are becoming more sought-after. Purchases on cards from the top prepaid issuers grew by 15.7 percent in 2014 when compared to 2013 according to the Nilson Report, which analyzes information from the industry of payment.

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Despite their popularity they do face some issues. The last year, both suffered technical issues that led to cardholders getting locked from their account for up to one week. At that point, any money on these cards, including income that had been directly transferred to the cards, was not available. Even in non-shocking situations they have many drawbacks.

Frequent fees

Prepaid debit cards typically charge fees for services you would normally get when you have a checking account for example, free ATM access, customer support as well as mobile and online services. In contrast to checking accounts, prepay cards typically don’t have ways to waive their monthly charges.

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Janice Elliot Howard, a writer living in Atlanta was the first to get the prepaid card which charged her a small fee every purchase. When she realized the amount that was costing, she quickly canceled it and bought one that doesn’t have purchase transaction fees.

It isn’t possible to avoid any fees, however.

“The disadvantage is the ATM surcharge [for cash withdrawals], but I do that very rarely,” she says.

One saving grace for many prepaid debit cards is that they don’t allow overdrafts or have overdraft-related fees. With a checking account you may be charged around $30 or $35 if you spend more than what the amount you have available on your bank account. But the frequent fees for transactions or ATM withdrawals can still increase.

Card details aren’t always clear

Elizabeth Avery bought a prepaid debit card in a drugstore for an upcoming trip overseas but later realized that the card could not be used in foreign countries.

“I discover that the small print is where I’m noticing the problems,” says Avery, the founder of travel site Solo Trekker 4 U and an investment banker in private equity located in Washington, D.C. She was planning to use her card in ATMs across the world for cash withdrawals and found no mention on the packaging’s exterior that it was intended for use in the United States.

And that’s not the only data that could be missing.

“The disclosures for prepaid credit cards sold at retail stores don’t demand that all fees to be disclosed on the packaging outside,” says Thaddeus King who is part of the consumer banking initiative at The Pew Charitable Trusts in Washington, D.C.

There is still no protection

Credit cards that are pre-paid, which are similar to debit and credit cards, are part of payment networks such as Visa and MasterCard. As a result, you can get protection against fraud on card purchases , but they do not have the protections that you get with an account at a bank.

“When it comes to bill pay as well as ATM transactions, these cannot be done through those networks, such as the Visa and MasterCard network,” King says.

Other payment platforms have similar exclusions. In these transactions, King adds, you need to trust the disclosures of your card, which may not include protections apart from those on purchases.

The debit cards that are prepaid don’t have to be insured by FDIC. Federal Deposit Insurance Corp., or FDIC, which is how customers are able to recover their funds in the event that their bank or card issuer fails. Although many prepaid issuers offer protection on their own however, their agreements with cardholders might state that their terms are subject to change at any time.

Checking accounts, on the other hand, must have more fraud coverage because of a that covers the electronic transactions as well as ATM transactions. They also have to be covered by the FDIC.

The good news for prepaid debit card holders is possible. It is believed that the Consumer Financial Protection Bureau plans to announce later in the year that would extend fraud protections for these cards in line with those for debit cards and checking accounts.

“Prepaid debit card users should have the same protections afforded debit card holders,” says Christina Tetreault who is a lawyer at the office of Consumers Union in San Francisco.

About the author: Spencer Tierney is an expert on certificates of deposit at NerdWallet. He has had his work highlighted on USA Today and the Los Angeles Times.

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