Prepaid, but not prepared for debit cards’ hidden fees

Buying a prepaid debit card these days is just about as easy as picking up a bottle of shampoo or a candy bar. Walk into a Walmart or almost any major drugstore, and rows of plastic worth $25, $100 and even $500 beckon from kiosks alongside prepaid phone cards and gift cards for retailers.

“No Credit Check. Safer Than Cash. No Bank Account Needed,” says the Green Dot Visa Prepaid Card: Just pay at the register and the card is ready for ATM withdrawals, store purchases and online shopping.

For many people who do not have bank accounts, or cannot get a credit card, the appeal is irresistible, making the reloadable cards among the consumer banking industry’s fastest-growing products. But their convenience comes with a catch: fees, often hidden in the fine print.

The MiCash Prepaid MasterCard docks cardholders a $9.95 activation fee. Like many competitors, it then charges numerous recurring fees, including $1.75 for each ATM withdrawal, $1 for each ATM balance inquiry, 50 cents for each purchase, $4 for monthly maintenance, $2 for inactivity after 60 days and $1 for a call to customer service.

“It’s a very expensive way to bank,” said Jean Ann Fox, director of financial services at the Consumer Federation of America.

A cottage industry only 10 years ago, reloadable prepaid cards have tapped into the vast pool of about 80 million consumers who have little or no access to bank accounts. The market includes college students who do not want to carry around wads of cash and consumers who do not want to type their credit card number into the Internet.

More typically, it is made up of low-income people and immigrants who have fewer financial options than other Americans. Often, they turn to these cards because they cannot open a bank account, or they become fed up with the costs of check-cashing stores or overdraft fees on checking accounts.

Industry officials say the cards are a good deal because users can avoid the fees charged on low-balance bank accounts and at check-cashing stores.

“If you look at these products today compared to even a checking account, many consumers have found that they can be far less expensive,” said Gary Palmer, chairman of the Network Branded Prepaid Card Association.

But even as the industry expands, many prepaid cards continue to charge fees — including for purchases and paying bills — that can quickly accumulate.

Because it is a relatively new industry, prepaid cards have not undergone the congressional and regulatory scrutiny of credit and debit cards. In the spring, lawmakers restricted interest rate increases and hidden fees on credit cards, and regulators are now examining stricter rules on overdraft fees on checking accounts. Even gift cards, which expire when the money runs out, will soon be subject to new rules limiting monthly fees and expiration dates.

Congress has asked regulators to determine if prepaid cards warrant the same protections extended to debit and credit cards. The industry’s trade association says such measures are unnecessary and would make cards more expensive.

But consumer advocates say the lack of regulation means that prepaid card users can continue to be blindsided by hidden fees, and have few legal protections to recover their money if a card is lost or a charge disputed.

Among the beneficiaries of these cards are Visa, MasterCard and Discover, which receive about a nickel to 20 cents each time a credit or debit card with their logo is swiped. While the companies do not disclose income from prepaid cards, their efforts to add tens of millions of users represents a potentially significant new revenue source.

Financial firms that issue the cards are often little-known, with names like Green Dot, NetSpend and AccountNow. Since they get money upfront from the consumer, there is relatively little risk with prepaid debit cards, compared with credit cards and other loan-making products.

Given the number of people who have little or no relationship with a bank, both in the United States and abroad, the financial industry is betting on a boom. In 2008, for instance, customers loaded about $8.7 billion onto prepaid cards, a 125 percent increase over the previous year, according to the Mercator Advisory Group. The industry is expected to balloon to $119 billion by 2012, Mercator predicts.

The cards are part of a larger universe of plastic that includes prepaid phone cards and gift cards, payroll cards and government benefit cards. Industry officials are particularly excited about the explosive growth from government agencies and companies as they replace paper checks with prepaid cards to save money. Social Security payments are now offered on prepaid cards to retirees without bank accounts, and many states do the same with welfare payments. Walmart recently said it would pay employees only on prepaid cards if they did not have a bank account for direct deposit.

These fees tend to be lower than those on commercial prepaid cards. But critics question why there are any fees at all, particularly when the recipients do not have a choice.

“To me, it’s a terrible thing to give people their pay on a card that has fees on it,” said Linda Sherry, director of national priorities for Consumer Action.

Reloadable prepaid cards hardly existed a decade ago. Then, as credit cards surged and the Internet bubble lifted the economy, a handful of firms noticed an untapped market in teenagers who wanted to shop on the Internet, but were not eligible for credit cards. It soon became clear that the larger market was people who do not use banks and the uncreditworthy.

In the years since, dozens of firms and banks have latched on, some offering celebrity branding to lure customers. Usher, Carmen Electra and football player Vince Young have all had their name attached to a card, and the hip-hop impresario Russell Simmons continues to back the RushCard, mainly to African-Americans, as a “better alternative” than banks and credit cards.

But these efforts are not without controversy. Simmons, for example, has batted down repeated criticism that his card saps money from low-income users. His Pay-as-You-Go card has come under scrutiny for charging a $19.99 activation fee deducted from the cash first loaded onto the card; a $1 convenience fee for the first 10 purchases every month; and a fee of $1 for every bill paid with the card.