DURHAM, N.C., April 10, 2012 /PRNewswire-USNewswire/ -- Reform of the rules governing prepaid debit cards are urgently needed in order to save low-income people from paying too much for risky products that are not an adequate substitute for a checking account, according to a new report released today from Reinvestment Partners http://reinvestmentpartners.org/prepaid‐cards.
The prepaid debit card is the fastest growing product in banking. Consumers put $30 billion on to prepaid cards in 2006. Last year, they deposited $230 billion. For people with very little money, the prepaid card is the suddenly the best alternative to a checking account or a check casher. Unfortunately, given their complicated pricing it is difficult to comparison shop for a card.
"Until all prepaid cards are safe, affordable, and fully functional," says Adam Rust, Director of Research at Reinvestment Partners, "they will still be a less-than-optimal substitute for a regular checking account. The reformed prepaid card will give consumers the services they need while protecting them from excessive fees, high-cost credit, and confusing disclosures."
With a reloadable prepaid debit card, consumers can deposit their paychecks, access ATMs, pay bills and even set aside money for savings. Now that free checking is going away, more people are leaving their local bank and switching to a prepaid card.
However, the costs and features of the cards vary considerably. Some cards might cost more than $50 a month to use every day but others might charge fewer than $5. In the recent past, one card came with a line of credit with an APR above 100 percent. Prepaid should be a safe harbor – free from high-cost credit and overdraft penalties – but until new rules are written to make them safe, affordable, and functional, the promise will not be a reality. Reform is urgently needed because it costing low-income households hundreds of dollars in fees every year. This new report lays out those guidelines:
- No credit: Until recently, one bank offered a line of credit with an APR of more than 120 percent on its prepaid cards. That is not right. The prepaid card should be a safe harbor from high-cost credit and from any overdraft penalties.
- A good product at a fair price: It is legitimate to charge a fee for a service of value, but it is wrong when misleading disclosures mask a card that will level numerous fees without corresponding value. Banks should capitalize upon existing technology to offer cards that come with online bill pay, savings accounts, surcharge-free ATM networks and FDIC insurance.
- They should have clear and complete disclosures that share common terms with other cards so that consumers can comparison shop for their card that bests suits their needs.
Making it easier to comparison shop is one important step that regulators can remedy. It is hard to shop because every card has a different combination of fees. The price of getting a card ranges from just a few dollars to as much as $59.95. Then there can be monthly fees, fees to add money to your card, fees to talk to customer service, and fees to take money out at an ATM.
"Finding the best prepaid card is difficult," says Rust. "For any potential prepaid card holder, there is definitely a 'best prepaid card,' but which one that might be depends upon how that hypothetical consumer might use the card."
The report's new cardSTAR disclosure box (www.card-star.org) can remedy that problem. It will help consumers make better choices when they buy a prepaid card. The report calls for a uniform standard akin to labeling for credit cards or food products. Through the QR code technology, consumers to access disclosure information when they buy a card in a store. cardSTAR makes clear what a card can and cannot do, warns consumers when they are risk of paying extra fees, and predicts costs for 4 different types of card users. "Now that the Consumer Financial Protection Bureau is ready to address disclosures for prepaid cards, it is imperative that they require every card to come with the same disclosure. A voluntary system is not adequate."
Reinvestment Partners (http://reinvestmentpartners.org) is a 501(c)3 group that advocates on behalf of consumers for economic justice and opportunity. Adam Rust is Director of Research at RP and the author of banktalk.org.
SOURCE Reinvestment Partners