May 172012

Millions of American households do not have access to traditional banking services, or choose not to use them. These households are increasingly making use of prepaid cards to pay bills online or over the phone, shop online, and receive direct deposits.

Why Prepaid Cards?

In the current economy, where millions of people have experienced home foreclosures, bankruptcies or are deeply in debt, a lot of people don’t qualify for credit cards. These people might buy prepaid cards that can be used like credit cards to pay bills or shop at regular brick-and-mortar stores.

Prepaid cards

Use of prepaid cards is growing, but watch out for hidden fees.

Others appreciate the ease of shopping online – and the good deals to be found – but are wary of submitting their credit card information or banking details. They worry about credit card theft, bank theft and identity theft. These fears are not baseless. Many online retailers have been hacked and had the credit details of thousands of customers stolen. Many consumers feel that prepaid cards, which do not carry any personal information or link to a bank account, are a more secure alternative.

For all these reasons, the use of prepaid cards is growing. These cards have been around for a long time in the USA, but in recent years their use has mushroomed.

In 2011, about 13 percent of U.S. consumers used prepaid cards, up from 11 percent the previous year, according to a study by California-based Javelin Strategy & Research.

Prepaid card use grew last year even though ownership of other more traditional financial products — such as credit and debit cards — decreased, according to the study.

Concerns About Fees

Consumer advocates point out prepaid cards often have excessive fees for basic activities and transactions, and many cards do not transparently disclose the fees.

There are fees to activate the card, fees to load additional funds onto the card, fees to check the balance, monthly maintenance fees, fees to call customer service, fees to use an ATM, and often fees simply to withdraw cash from the card.

Consumers are often not aware of these fees, and the prepaid card industry is not required to fully disclose them. These fees add up and can make a prepaid card much more expensive than a bank account, which places an added burden on the poor and financially disadvantaged.

“I don’t think everything about prepaid is bad, and I think there is a need for it and a market it makes sense to serve,” says David Rothstein, project director for asset building with Policy Matters Ohio. “I think the biggest problem is that to some degree the product has come out before the protections and the network are in place.”

Rothstein said people commonly treat prepaid cards as gift cards when they are a completely different product that serve a different purpose.

“Moving people away from (the gift card) mentality is really important,” he said.

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