NEW YORK (MainStreet) - More lower-income Americans are using prepaid cards, especially the so-called "unbanked" who shy away from financial institutions.

Somewhat disturbingly, though, those financial types who've gone "rogue" are using their prepaid cards in ways that regulators didn't intend. That's the conclusion of a new report from the Pew Charitable Trusts. The report states that users of general purpose reloadable (GPR) prepaid cards are "on the rise" but that unbanked consumers are increasingly using their cards as pseudo checking accounts. That brings up "safety and transparency" issues according to Pew analysts, who call on the U.S. Consumer Financial Protection Bureau to more closely scrutinize the prepaid card industry.

Currently, about 23 million Americans use prepaid cards (up 50% from 2012), which enable users to load funds via direct deposit or with cash and can then be used to withdraw funds from ATMs or to make purchases at retail outlets. That's an encouraging number if you're an executive at a prepaid card company, but it should be a discouraging one for financial consumer advocates and possibly for prepaid card users, too.

"Our data show that the unbanked use their prepaid cards like checking accounts, reloading them more frequently and registering them more often," notes Susan Weinstock, director of Pew's consumer banking project. "In contrast, people with bank accounts use the cards more like an ancillary financial product in that they load funds on a card, spend it down, and then buy another one. When a prepaid card is someone's only transaction account, it is especially important to ensure that the card is safe and comes with uniform protections against theft, loss, and deception."

Currently, Pew reports, GPR prepaid cards are not required to have the same level of protection as traditional bank accounts, such as FDIC insurance (although many cards do), liability coverage for unauthorized transactions and restrictions on overdrafts. Consequently, prepaid card users should be careful, whether they have a bank account or not (but especially if they don't.)

"The biggest problem with consumers having their money tied up in prepaid cards comes to play when the card issuer is not a bank," says Robert Harrow, a research analyst at Value Penguin, a consumer finance research firm. "If the institution which prints the card goes out of business, the consumer will lose all their money, since many non-bank prepaid cards are not FDIC insured."

Frank Dombroski, founder of FlexWage, a company whose mission is to improve access for the unbanked to stable financial services options, notes that there are about 70 million Americans who are either unbanked or without credit -- and many of them rely on prepaid cards. "Prepaid accounts are a very cost effective alternative to low balance checking accounts," Dombrowski says. "Prepaid accounts do not require a credit check. Most providers of payroll cards, and some general purpose, reloadable (GPR) cards charge no fixed monthly fee. Plus, most low balance checking accounts charge $10 to $12 per month, so they're accessible to unbanked consumers."

In some ways, he says prepaid cards actually are similar to checking accounts. "Both prepaid and checking accounts enable employees to have instant access to their direct deposit pay, without the expense and time consumption of check cashing services," he says.

That said, there are some 'rules of the road for prepaid card users who view their cards as a substitute for bank accounts. "To minimize transaction fees, users should review the terms and conditions associated with their prepaid card," Dombroski adds. "You can minimize prepaid card fees by using cards strictly for point of sales transaction, as most providers charge no fee for point of sale transactions. This enables card users to use the card to purchase goods and services without additional fees."

Also, use debit "PIN" transactions for cash back purchases, Dombroski adds. "Fees are minimal, and consumers can still make a purchase and get some cash back in the process, for around $0.50 per transaction," he says.


By and large, prepaid card users who use their cards as shadow checking accounts are in danger of racking up big fees, face risks with non-FDIC-backed cards, and are generally missing the point on prepaid cards. They exist for three reasons - to make purchases/pay for services, get cash back and to help rebuild sour credit. Use them for anything else, the experts say, and you're just tempting fate.