From a total of 10 million prepaid debit and payroll cards in use in 2010, an estimated total of 25.6 million such cards are expected to be in consumers’ hands in 2015. The amount of dollars loaded onto the cards is expected to rise from $56.6 billion in 2010 to an estimated $149.1 billion this year.
Prepaid debit cards are attractive to consumers who cannot get or do not want either a checking account or a credit/debit card. The cards also appeal to parents who want either to teach their kids financial responsibility or to limit how much their college student offspring spend.
Many employers, including Wal-Mart Stores Inc. (NYSE: WMT), McDonald’s Corp. (NYSE: MCD), and Home Depot Inc. (NYSE: HD), either offer or require employees to receive their pay by prepaid card or direct deposit to a bank account instead of receiving a paper check. The companies are saved the cost of issuing paper checks, a significant expense for employers with hundreds of thousands of employees. Payroll cards are reloaded at each pay period.
A survey of 31 prepaid cards conducted by Bankrate.com Inc. (NYSE: RATE) revealed wide variation in both the types of fees charged on prepaid cards and the amount of those fees. For example, some 29% of prepaid card issuers do not belong to an ATM network, which means that card holders will pay a fee of $1 to $3 to the card issuer, as well as a separate fee to the bank that owns the automated teller machine, for every cash withdrawal. A single withdrawal from the prepaid card could end up costing $5 or more.
Checking the balance on the card is not free for 39% of the cards surveyed by Bankrate.com. Fees ranged from $0.50 to $1.50 for checking a balance at any ATM. If the card issuer does belong to an ATM network, 42% of those issuers will let customers check balances for free at an in-network machine, but charge the same fee for out-of-network balance checks. More than half — 55% — of card issuers make customers pay $1 to $5.95 for a paper statement.
Then there are activation fees that run from $1.88 to $9.95 on 48% of cards. Monthly maintenance fees apply on 75% of the prepaid cards unless customers arrange for a direct deposit to the card.
Then there’s the ever-popular “overdraft protection,” wherein the card issuer covers a purchase for which the card does not have sufficient cash then charges the customer a fat fee in addition to the amount lent the next time cash is loaded on the card. The good news is that only two of the 31 cards reviewed by Bankrate.com still offer this “service.”
Among what the survey noted as “weird” fees at the margin are these:
- Almost a quarter of cards charge some kind of fee for making a purchase at a point of sale, ranging from $0.50 up to $2.00.
- Inactivity fees, charged to cards that are not used for a certain period, still appear on 16% of cards.
- The number of prepaid cards charging for a call to customer service is falling, but 16% of cards still charge a fee of $0.50 to $4.95.
The Consumer Financial Protection Bureau (CFPB) is currently preparing a rule that would give the agency the power to regulate prepaid cards.