Prepaid Cards: Second-Tier Bank Account Substitutes

Prepaid Cards: Second-Tier Bank Account Substitutes
Consumers Union, the nonprofit publisher of Consumer Reports ®
By: Michelle Jun, Staff Attorney

With Consumer Federation of America and National Consumer Law Center, on behalf of their low-income clients
September 2010

Prepaid cards are widely marketed as more convenient, safe and cost effective, a straightforward way to manage funds, particularly for consumers who are underbanked or unbanked. The prepaid card industry touts the products as convenient budgeting tools that can help build credit. Prepaid card companies also seek to appeal to consumers who are becoming increasingly dissatisfied with banks. But the devil is in the details, and upon closer examination, these cards are laden with numerous types of fees and other gotchas, making prepaid cards a shaky alternative to a bank account with a debit card.

This report discusses the prepaid card market and details needed improvements. The federal regulations under the Electronic Fund Transfer Act must be updated to protect prepaid cardholders when cards are lost or stolen or when funds go missing. Prepaid cardholders should be fully protected if the bank issuing the card fails. Fees should be simplified and clearly and consistently disclosed so that consumers can see the fees up front and comparison shop easily before handing over any money. Finally, claims for certain prepaid card product features such as small credit lines and credit building appear to be overstated.

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