Editors' pick: Originally published Oct. 4.
Bad credit is one of the primary reasons why the unbanked and underbanked population trends toward reloadable debit cards as a tool to replace the traditional bank account. But that trend is driving them into dire financial straits.
Nearly one-third or 106 million people are considered to be unbanked or underbanked, according to the Federal Deposit Insurance Corporation (FDIC), meaning they don't have bank accounts or regularly make non-bank financial transactions. This includes those from low income backgrounds, but also younger consumers whose credit isn't necessarily tarnished but who are instead wary of banks and desiring a more unencumbered financial relationship.
While easy to use, reloadable debit cards are often riddled with fees and restrictions, and they may not offer the same protective benefits of a checking account.
A general overview of prepaid reloadable debit cards shows that most cards carry a fee for monthly maintenance, card activation, ATM withdrawal and a check balance fee. Consumer Reports says while today's prepaid debit card issuers are more transparent about their fees, charges are still high.
The consumer watchdog organization reports the Univision MasterCard Prepaid card charges a monthly fee of $9.95 and both of the NetSpend Prepaid Visa cards charge $2.50 for an "over-the-counter cash withdrawal at a financial institution" in addition to ATM card use. Additionally, Consumer Reports says fee language varies from provider to provider. For instance, the Walmart Money Card says purchasing their card is considered to be a "purchase fee" but for the same action, the U.S. Bank Contour Card refers to it as an "enrollment fee."
Also, some of the prepaid "vanity" cards, such as the now deceased Kardashian Card, tend to have higher-than-average fees. The National Consumers League found the Kardashian Card charged $7.95 for monthly maintenance, a $2 bill pay fee per transaction, a $1 fee to add value to card and $1.50 fee when the user spoke with customer service.
"Fees can often depend on the carrier and can be very deceptive," explains Michael Shaw, program officer of human services at The Kresge Foundation. "The Consumer Financial Protection Bureau is working hard to create transparency surrounding prepaid reloadable debit cards, because oftentimes these fees may look like nominal charges, but a few dollars here and there really add up and if you look at them in terms of a percentage against the whole sum of money in the pot--the percentage is high compared to the hard dollar cost."
Andrew Downin, managing director of innovation at Filene Research Institute, says consumers should view prepaid reloadable debit cards like any financial product. "They aren't necessarily good or bad, but you need to be aware of underlying features such as pricing and fees," he says. "Approach it the same way you might research an auto loan by checking rates, terms and conditions--they all vary."
He adds Filene tracks the good, bad and ugly players in the marketplace. "We've seen the cards that charge very high fees for purchase, monthly maintenance, per transaction fees, call for balance fees, but others offer only a few nominal fees," he says.
Why Are Reloadable Prepaid Cards Attractive?
The ability to transfer cash has been a challenge for low-income consumers, and cash flow is important to handling the expense of necessities, Shaw says. "Conceptually this is not a horrible idea," he says. "However, the concern is around fees and their extractive nature."
Pew Charitable Trusts, in examining the motivation of prepaid debit card users and the prevalence of use among American consumers, found:
*Use is increasing, rising over 50% between 2012 and 2014, driven primarily among those who have a transactional account and higher incomes.
*Reloadable debit cards are being used like a checking or transactional account. Unbanked users check their balances and reload cards more frequently.
*Unbanked prepaid reloadable debit card users typically have incomes of less than $50,000 a year; approximately one-third made $15,000 a year.
*Unbanked users characteristically use reloadable prepaid debit cards as a budgeting tool to help control spending.
The survey also found many card holders are unaware if their funds are FDIC insured or have an arbitration clause. While Pew says these features are dependent upon the carrier, it is up to the user to read disclosures carefully to understand coverage.
"While protections depend upon the particular carrier, most large insurers like Visa or MasterCard typically have protections if your card is lost or stolen," Downin says. "Visa and MasterCard have maximum loss limits, which is one consideration users should take into account when selecting a reloadable prepaid debit card."
Consumer Reports says while the agency's rated prepaid reloadable debit cards offer some protections, no required regulations are in place. The organization urges consumers to take the lack of legal protections in to consideration before determining if a prepaid card is right for them.
Prepaid Reloadable Debit Cards Aren't the Only Answer for Low Income Consumers
Fee driven reloadable debit cards aren't the only answer for the unbanked, and underbanked and transactional accounts can be a solution.
"Credit unions are one avenue and often have products that address the needs of the underbanked or unbanked that are below market and transparent," Shaw says. "But part of the challenge is to know how to permeate this market. There isn't a lot of trust amongst consumers who have historically had trouble obtaining a traditional banking account."
Shaw says the best way to educate and communicate to the underbanked and unbanked population is through various neighborhood groups and outreach. "A trusted neighborhood group will be honest about who the consumer can trust," he says. "Banks just aren't a trusted source in the community."
Beyond the underbanked and unbanked community, Downin says trending toward transactional technology in general will become more prevalent. "We expect to see a greater usage in general because if you think about it, the notion of a checking account is rooted in the term based on a paper check," he says. "Technology and the underlying features of the prepaid reloadable debit cards may end up being the caveat of what rebrands the traditional checking account."