As Reloadable Cards Increase, Concerns Grow About Fees, Protection

The increasing popularity of reloadable prepaid cards, particularly among the unbanked and underbanked, has begun to raise alarms among consumer advocates who view the cards as subject to capricious pricing and lacking important protections offered on bank cards. And, as larger merchant and other enterprises become active in issuing these cards, advocates are lobbying for greater oversight. “Consumers are turning to debit and debit-like products as the economy continues to tighten, so it becomes even more important to guarantee protections,” Michelle Jun, staff attorney in the San Francisco office of Yonkers, N.Y.-based Consumers Union, tells Digital Transactions News. In a report written by Jun and issued this month by CU, the consumer group calls on the Federal Reserve to reconsider amending Regulation E to extend such protections as right of recredit and chargeback rights to reloadable prepaid cards. Common to credit and signature-based debt cards, right of recredit covers cases of unauthorized use and chargebacks refer to disputed transactions. While the Fed declined in 2004 to extend Reg E to cover prepaid cards, citing the “limited” and “short-term” nature of the accounts, Jun argues times have changed. “There have been huge strides in reloadable cards as Wal-Mart has launched and a number of other issuers have launched,” she notes. “In light of that, the Fed should act.” Jun's report, “Prepaid Cards: Second-Tier Bank Account Substitutes,” also faults the cards for poorly disclosed, high, and widely varying fees, arguing the total monthly cost for usage should be capped. Among 18 reloadable cards examined, the report found activation fees ranging from $3 to $99.95; monthly fees from $2.95 to $10; and dormancy fees (levied by eight of the 18) from $1.95 to $9.95 per month. These and other fees, it says, should be laid out on card carriers in a standardized fashion not unlike the so-called Schumer boxes used by credit card issuers. The report further argues that charges for overdrafts should be eliminated. The report found 10 cards charging overdraft fees ranging from $24.90 to $29. The number of reloadable cards bearing a Visa, MasterCard, American Express, or Discover logo reached 20 million last year, estimates Mercator Advisory Group Inc., Maynard, Mass. That's up from 12 million in 2007 and 6.9 million in 2006, the firm says. Many issuers specifically target unbanked and underbanked consumers. This is a key demographic for Wal-Mart, whose 2-year-old MoneyCard is in the hands of 2 million customers. Tim Sloane, director of the prepaid advisory service at Mercator, agrees issuers need to do more to disclose their fees. The guidelines, though, should be industry-driven rather than imposed by regulators, he says. Schumer boxes, he argues, would not work on card carriers because they require too much space. As for fees being too high, he cites a staff working paper released this week by the Federal Reserve in which the authors concluded that low- and moderate-income households in Detroit spend about 1% of annual income on transactional and credit products. “…LMI households do not always choose the most expensive financial-services option,” says the working paper. “Consumers tend to be pretty sharp,” says Sloane. As for overdrafts, Sloane says these often result from consumers using prepaid cards to pay for gym memberships and other such recurring charges where costs quickly outstrip the value loaded on the cards. Issuers, he says, must assess fees to recover network and paperwork costs they incur to cover these charges. Analysts at CU, says Sloane, “ought to be a program manager for a while and get a feel for the scale of the overdraft problem.” Reg E protections are available from at least some issuers, Sloane adds. “Those cards that don't offer Reg E, stay away from them,” he says. But Jun argues such protection can't be left to the caprice of individual companies, or individual customer-service representatives. “We have continuously asked the Federal Reserve Board to take a look at [extending Reg E] again,” she says. “Our hope is that as more consumers are using the cards, there's no time like the present.”