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Prepaid Debit Cards Are Popular But they do have some drawbacks

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Prepaid Debit Cards are Popular but Still Have Downsides

by Spencer Tierney Senior Writer | Certificates of deposit and ethical banking, as well as banking deposits Spencer Tierney is a consumer banker writer at NerdWallet. He has covered personal finance since 2013 with a focus on certificate of deposit as well as other banking-related topics. His work has been featured on The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among other publications. He is located in Berkeley, California.

Aug 10, 2016

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Walk into one of the convenience stores like 7-Eleven or CVS Pharmacy and you’re likely to find a few pre-paid debit cards hung on shelves.

These cards, employed for budgeting and as checking account substitutes, are getting more popular. The number of purchases on cards issued by the biggest prepaid issuers rose 15.7% in 2014 compared with the previous year, according to The Nilson Report, which analyzes information from the industry of payment.

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Despite their popularity they do face some issues. In the last year both the and experienced technical issues that led to cardholders being shut out of their accounts for up to a week. At that point, any money on these cards, even income that was directly deposited onto them, was unavailable. However, even in the absence of extreme situations they have numerous disadvantages.

Frequent fee

Prepaid debit cards typically charge you fees for services that you would normally get with a checking account, like free ATM usage, customer service, and online and mobile services. And unlike checking accounts, prepaid cards often don’t offer ways to waive their monthly fees.

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Janice Elliot Howard, a writer living in Atlanta was the first to get an prepaid card that would charge her a small fee every purchase. After she realized how much it was costing her, she quickly canceled it and bought a card that doesn’t charge purchase transaction fees.

It isn’t possible to avoid any fees, however.

“The downside is the ATM charge [for cash withdrawals], but I do that very rarely,” she says.

One benefit of many debit cards that are prepaid is that they don’t allow overdrafts or have overdraft-related fees. If you have a checking account you may be hit with an of around 30 or 35 cents for spending more than the amount you’ve got in your account. But the regular fees for transactions and ATM withdrawals can still be significant.

The card details may not always be clear

Elizabeth Avery bought a prepaid debit card from a pharmacy for an upcoming trip overseas but later realized that the card couldn’t be used overseas.

“I find that the fine print is where I’m seeing problems,” says Avery, the founder of travel site Solo Trekker 4 U and an investment banker for private equity working in Washington, D.C. She was planning to use her card at international ATMs to get cash and had not found any mention of the card’s outside packaging that it was only for domestic use.

But that’s not all the information that can be missing.

“The disclosure for prepaid credit cards sold at retail doesn’t need that all the fees need to be disclosed on the outside packaging,” says Thaddeus King who is the head of the consumer banking program in the Pew Charitable Trusts in Washington, D.C.

Protections still lacking

The debit card you use to pay for purchases, like debit and credit cards belong to payment processors like Visa or MasterCard. In the end, you can get protection against fraud on card purchases but not the broader protections you can get from the bank account.

“When it comes to payment of bills and ATM transactions, they are not done on the Visa or MasterCard network,” King says.

Other payment platforms have similar exclusions. For these transactions, King adds, you have to depend on the disclosures provided by your card, which may not include protections , unless they are specifically for purchases.

Prepaid debit cards don’t have to have insurance from the Federal Deposit Insurance Corp., or FDIC, which is how customers can get their money back if their bank or card issuer fails. Although many prepaid issuers offer insurance on a voluntary basis, their cardholder agreements may say that the terms can change at any time.

Checking accounts, on the other hand, must have more fraud protection because it protects both electronic as well as ATM transactions. Additionally, they must be insured through the FDIC.

A good thing for debit card holders with prepaid cards may be in the works. It is believed that the Consumer Financial Protection Bureau plans to announce later in the year that would extend fraud protections for the cards to be comparable to those that cover debit cards and checking accounts.

“Prepaid debit card users should have the same protections as debit card holders,” says Christina Tetreault the lawyer at the office of Consumers Union in San Francisco.

Author bio Spencer Tierney is an expert in the field of certificates of deposit at NerdWallet. The work of Spencer Tierney has been highlighted in USA Today and the Los Angeles Times.

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