Reloadable prepaid cards can do most things a checking account can do, and many people use them instead of a bank.
But few cards warn you upfront about all the fees they carry, research by CreditCards.com found. The lack of transparency makes it hard for consumers to pick the one that's best – and cheapest – to use.
We looked at the fees printed on the packaging of 10 widely available prepaid debit cards sold at big retailers, drugstores, grocery stores and payday lenders. Just three met the disclosure standards recommended by the Consumer Financial Protection Bureau. Seven fell short by not disclosing important comparison information on the exterior of packaging, or not revealing it at all.
“There is so much variation between them,” said Christina Tetreault, a staff attorney at Consumers Union who works on financial issues. “It makes it hard for consumers to comparison-shop.”
Three cards – American Express Bluebird, American Express Serve and Green Dot’s prepaid card – met the disclosures proposed 18 months ago by the CFPB. The agency is expected to make its proposal a regulation as early as June. Seven others did not meet the now-voluntary disclosure standards.
Flunking the test: high-fee cards sold at two payday lenders. Workers at ACE Cash Express and Speedy Cash sold cards over the counter without any packaging or other fee information. As a result, the ACE Elite card and Opt+ cards came without any fee disclosure in our shopping survey, until requested. Both companies said that was not how their branded prepaid cards are supposed to be sold -- but a follow-up visit at a different ACE Cash Express store yielded the same result.
“Disclosures are really important,” said Susan Weinstock, director of the consumer banking initiative at Pew Charitable Trusts, which tracks prepaid cards. “We need [the CFPB] to finalize that rule so that people get those very clear disclosures in their hands.”
As of February 2016, the CFPB had fielded 4,300 complaints about prepaid cards since mid-2011. “A variety of fees – replacement card, monthly, inactivity, transaction, balance inquiry, PIN change and overdraft – are a major concern for consumers,” the agency said in a March 2016 report.
Why it matters
Consumers are flocking to prepaid debit cards as a supplement to their bank account – or a substitute for one. Reloadable cards handled 3.1 billion payments in 2012, up from nearly zero just six years earlier, according to the Federal Reserve’s payments study. By 2014, one quarter of U.S. households had a general purpose reloadable debit card, according to Phoenix Marketing International’s Consumer Payments Monitor.
Most can load your paycheck automatically by direct deposit. They can pay bills online and get cash at ATMs. They can make purchases in stores and online, using a transaction network such as Visa. The card company runs the operations and makes the rules, while a bank partner holds the money behind the scenes.
Prepaid cards differ from banks in several big ways. Most banks wouldn’t charge you to deposit cash or take out money from the bank’s own ATMs. But nonbank prepaid cards may have a fee to load cash and may not offer a fee-free ATM. They may even charge you each time you use the card to buy something – or for not using it enough.
“In 2014, we found lots of fees for each transaction,” Weinstock said. “Each time you swipe a card to do this or that, you’d incur a fee.”
A year later, Pew’s follow-up study found many cards had adopted a monthly fee, making expenses more predictable, she said. However, CreditCards.com’s analysis found the per-transaction fee remains an option on some cards.
Consumers shopping online can find the full terms and conditions, maybe with a little effort. But buying a card in person means relying on the information listed on a package about the size of a smartphone. You can read the full terms and conditions inside the package, but by then you’ve bought the card.
Two American Express cards examined had a relatively easy job listing their fees – they don’t have many to list. AmEx’s Bluebird card doesn’t charge for inactivity, replacement cards or foreign transactions, which are extra on most cards. ATM withdrawals are free in the Money Pass system, and there’s not even a monthly fee. The AmEx Serve card also omits many common fees, as long as you use affiliate networks to load cash and withdraw it.
Unwelcome surprises
Since prepaid cards don’t require a credit check, why would anyone pick a more expensive one over a low-fee rival?
Experts in industry and consumer advocacy said there are trade-offs that can make higher-fee cards worthwhile. AmEx isn’t accepted at as many retailers as Visa and MasterCard, for example. And being near a location where there’s no fee for putting cash on your card – and getting cash out – can be a powerful selling point.
But not knowing the full list of fees still snags people into a worse deal than they were expecting.
“One we hear complaints about is inactivity fees,” Tetreault said. “Sometimes the window is very short, sometimes it’s quite wide and some don’t charge it at all.”
Of the 10 cards examined, two that carried inactivity fees disclosed them on the outside of the packaging. A third did not, because it came with no packaging or other fee disclosure. An ACE Cash Express worker handed the ACE Elite card across the counter at an Austin, Texas, location without packaging or other fee disclosure. The shopper was asked to push a button on a card reader indicating acceptance of the terms and conditions. The employee provided a pamphlet with the terms and conditions on request, showing that an inactivity fee of $5.95 a month would kick in after 90 days without use.
ACE referred questions to NetSpend, which provides the ACE-branded prepaid cards. Julie Henken, NetSpend vice president of partner services, said that the disclosure pamphlet is supposed to be handed over with the card.
“It’s absolutely always our policy that any prospective customer receive the full terms and conditions,” she said. The location would be reminded of the policy, she added.
Sale first, then disclosure
However, a follow-up visit to an ACE Cash Express location in Silver Spring, Maryland, yielded the same results. The clerk sold the card and prompted the shopper to accept the terms and conditions before providing a pamphlet with fees and other terms of the card.
ACE was not the only payday lender that sold a prepaid card without a look at the fee chart, however. A Speedy Cash loan store in Austin sold its Opt+ card the same way, until the terms were requested. Like ACE, the Opt+ card’s initial fee structure includes per-purchase fees, which can add up quickly. It doesn’t charge a conventional inactivity fee, but levies a “dormancy fee” of $5 after 12 months with no activity.
In an email response to questions, Opt+ said its policy is for terms and conditions to be provided with the card. During a follow-up visit to a Speedy Cash location in Mobile, Alabama, after the company was questioned about the lack of fee disclosure, the worker at the counter did give the shopper the terms brochure, including a fee chart, during the sign-up process.
Like most prepaid cards, the ones sold by payday lenders have a mix of potential fees that can rack up high costs for the unwary. Opt+ charges $2 for each purchase, unless you enroll in a plan with a monthly fee of $8.95. The monthly fee drops to $5.95 if you enroll in direct deposit that automatically loads your paycheck onto the card. The ACE Elite card charges $1 to $2 per purchase, or a monthly fee of $9.95. The monthly fee drops to $5 with direct deposit of at least $500 a month.
Comparison shoppers drive down fees
The prepaid card industry says competition is driving down fees and consumer advocates don’t dispute it. But the two groups differ on how much disclosure is enough, and how much is consumer overload.
“Most cards have fulsome disclosures, it’s just the format is different,” said Brad Fauss, CEO of the Network Branded Prepaid Card Association. The association supports disclosure of all the standard fees on card packaging.
How you use a card can make a huge difference in cost, underlining the importance of knowing the ins and outs of a card’s fees. For example, even a relatively low-fee card such Green Dot can be costly, depending on use. A user making 20 purchases a month, four ATM withdrawals and four cash reloads could pay as much as $35.75 in fees. But knowing how fees are structured, the same user could cut the monthly cost to $5.95, the amount of the monthly service fee. And even that fee can be eliminated with direct deposit of a paycheck, bringing monthly costs to $0.
On the higher-fee ACE Elite, the same usage pattern could rack up $45.80 in fees, including $1 per purchase transaction. Opting for a cheaper service package and using direct deposit can reduce the cost significantly, but still leaves $15.95 in monthly service fees and ATM fees. The card’s terms suggest getting cash-back during retail purchases to reduce ATM use.
Issuers want to avoid surprise fees that cost them customers, said Ben Jackson, director of prepaid at Mercator Advisory Service. Cards only make a profit for the issuer after they’re used for several months.
“The operators I talk to say, ‘I want cards to last a long time. I don’t want people leaving on me,’” Jackson said. “If someone gets hit with a surprise fee, the first thing they’re going to do is try to get out of that card.”
How we did the analysis
To compare how well prepaid cards disclose their fees, CreditCards.com selected a cross-section of general purpose reloadable cards available at large retailers, grocery stores, drug stores, dollar stores and payday loan offices. Bank-issued cards were omitted as they are often used in conjunction with a bank account, avoiding many of the fees such as cash reload fees and ATM fees that can be major costs of using a bank-substitute card.
The cards were evaluated using the U.S. Consumer Financial Protection Bureau’s proposed model for debit card packaging. The model form lists 10 specific, recurring fees and calls for the disclosure of three unspecified “incidence based” fees that a card might charge, such as for foreign transactions, a replacement card, or a request for a paper statement.
Web editor Jeff Herman and reporter Sienna Kossman contributed to this report.
See related: 9 things you need to know about prepaid cards
