Why Prepaid Card Users Have Their Panties in a Twist

Here's the reason for the confusion.
By MainStreet Team ,

By Robert McGarvey

NEW YORK (

MainStreet

) -- Confusion. That is the one word summation of consumers thinking about the protections they have, or may not have, when they use prepaid cards.

"Most consumers have no idea what protections come with prepaid cards," said Leslie Tayne, a Long Island lawyer who specializes in debt and credit counseling. She added: "There are so many variations, it makes your head spin."

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"There's a lot of confusion and there also is a multitude of flavors of prepaid cards," said Terry Maher, corporate counsel to the Network Branded Prepaid Card Association, a trade group.

Maher's point: different cards carry vastly different protections and therein lies a potential for a world of consumer misery.

Lose a credit card and matters are simple. The Fair Credit Billing Act caps losses on a lost or stolen credit card at $50, and zero if loss is reported before any misuse.

With debit cards, the Electronic Funds Transfer Act kicks in, and it caps losses at $50 if loss is reported within two business days of learning it happened, $500 if notification is made within 60 calendar days, and losses are unlimited if notification is not made within 60 days.

Here's the problem with prepaid cards: With some, when you lose one, you lose, period; the dough evaporates. With others, protections - although not as good as credit cards - but exactly equal to those of debit cards apply, said Bertrand Sosa, a founder of prepaid card leader NetSpend who now is president of Rev Worldwide, a payments innovator. He admitted however that "there are fly by night operators who hurt the industry's reputation." And of course they also hurt the consumers they fleece.

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This matters, because the prepaid card market is huge and it is getting bigger.

Research firm Mercator pegged the amount Americans will put on reloadable prepaid cards this year as over $200 billion, up from $28.6 billion in 2009, and now two of the biggest banks -

Chase

and

Wells Fargo

- offer their own prepaid cards.

Mercator, meanwhile, pegs the market size of so-called "closed loop" prepaid cards at around $300 billion, and these are cards - typically issued by merchants - that include gift cards, rebates, incentives and similar. In many cases these are single use cards that cannot be reloaded.

Who uses prepaid cards? Mainly, the cards are a cash replacement relied on by individuals who typically cannot get a traditional bank account, either because of past credit irregularities or maybe because they bounced checks. Note: in many cases they are no cheaper than an account at a standard bank, because reloadable prepaid cards typically have a blizzard of fees such as account activation ($3 to $14.95 according to

Consumer Reports

), monthly fees up to $10, ATM use fees usually of $2 per withdrawal (plus the charge imposed by the ATM owner), even in some cases customer service fees of a few dollars per call.

Compare that to the $12 monthly Chase charges for Total Checking, free with $1500 minimum daily balance or with a couple direct deposits.

But the still-bigger problem, said many experts, is that most prepaid card users simply are clueless about the protections they have.

Big name brand cards, incidentally, including

Chase

's,

American Express

's BlueBird, the

WalMart

MoneyCard, Green Dot, and any card that can accept Federal Government benefits generally have the same protections as debit cards, said Maher.

Ditto for cards that have acceptability over the Visa and MasterCard networks.

Look for that, suggested Sosa, also look for FDIC insurance, which means that if the issuer goes broke, the U.S. government backs the card.

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"Also - before putting money on a card - look at the terms and conditions, the fees, the protections," Sosa added. Issuers, he stressed, put all of that in writing so there should be no surprises for consumers who practice due diligence

Now for the hard question: what happens if you lose a onetime use card - a gift card, say, or a rebate? The sad news: probably you are out of luck.

It's possible that a quick phone call to the issuer may result in issuance of a new card, assuming nobody used the lost card and the value is intact, but the reality is that losing a $50 gift card isn't much different than losing a $50 bill and you know how that story ends.

--Written by Robert McGarvey for MainStreet

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