Buying a prepaid debit card these days is just about as easy as picking up a bottle of shampoo or a candy bar. Walk into a Wal-Mart or almost any major drugstore, and rows of plastic worth $25, $100 and even $500 beckon from kiosks alongside prepaid phone cards and gift cards for retailers.
“No Credit Check. Safer Than Cash. No Bank Account Needed,” says the Green Dot Visa Prepaid Card: Just pay at the register and the card is ready for A.T.M. withdrawals, store purchases and online shopping.
For many people who do not have bank accounts, or cannot get a credit card, the appeal is irresistible, making the reloadable cards among the consumer banking industry’s fastest-growing products. But their convenience comes with a catch: fees, often hidden in the fine print.
The MiCash Prepaid MasterCard docks cardholders a $9.95 activation fee. Like many competitors, it then charges numerous recurring fees, including $1.75 for each A.T.M. withdrawal, $1 for each A.T.M. balance inquiry, 50 cents for each purchase, $4 for monthly maintenance, $2 for inactivity after 60 days and $1 for a call to customer service.
The Millennium Advantage Prepaid MasterCard goes further, listing an application fee of up to $99. The Silver Prepaid MasterCard advertises that it does not charge for overdrafts as many debit cards do, but it gives itself the option of charging a $25 shortage fee if customers exceed their balance.
“It’s a very expensive way to bank,” said Jean Ann Fox, director of financial services at the Consumer Federation of America.
A cottage industry only 10 years ago, reloadable prepaid cards have tapped into the vast pool of about 80 million consumers who have little or no access to bank accounts. The market includes college students who do not want to carry around wads of cash and consumers who do not want to type their credit card number into the Internet.
More typically, it comprises low-income people and immigrants who have fewer financial options than other Americans. Often, they turn to these cards because they cannot open a bank account, or they become fed up with the costs of check-cashing stores or overdraft fees on checking accounts.
Industry officials say the cards are a good deal because users can avoid the fees charged on low-balance bank accounts and at check-cashing stores.
“If you look at these products today compared to even a checking account, many consumers have found that they can be far less expensive,” said Gary Palmer, chairman of the Network Branded Prepaid Card Association.
But even as the industry expands, many prepaid cards continue to charge fees — including for purchases and paying bills — that can quickly accumulate.
Like many workers, Tyrell Blocker, 20, of Brooklyn, could ill afford the surprise when he took such a card last week to a Pay-O-Matic Financial Services store in Manhattan after a bank turned him down for an account because he lacked one of two required pieces of identification. As soon as the cash from his paycheck landed on his card, he noticed fees accumulating. Mr. Blocker returned to Pay-O-Matic to complain and only then was provided a detailed list of more than two dozen fees, he said.
“I need every last dime I got; I’ve got a newborn,” Mr. Blocker said. A spokesman for Pay-O-Matic said the card was fairly new and the firm was working to make the fees more transparent.
Little Regulatory Scrutiny
Because it is a relatively new industry, prepaid cards have not undergone the Congressional and regulatory scrutiny of credit and debit cards. In the spring, lawmakers restricted interest rate increases and hidden fees on credit cards, and regulators are now examining stricter rules on overdraft fees on checking accounts. Even gift cards, which expire when the money runs out, will soon be subject to new rules limiting monthly fees and expiration dates.
Congress has asked regulators to determine if prepaid cards warrant the same protections extended to debit and credit cards. The industry’s trade association says such measures are unnecessary and would make cards more expensive.
But consumer advocates say the lack of regulation means that prepaid card users can continue to be blindsided by hidden fees, and have few legal protections to recover their money if a card is lost or a charge disputed.
In a video interview on the NYT site, Blocker said that he tried to open a bank account, but the bank required two forms of ID. I believe that banks are allowed to require two forms of ID under the Patriot Act, but are not required to do so. Almost all Americans have a driver's license, but poorer Americans may not have any other form of ID. A passport or a birth certificate would probably be common second forms of ID. For poor people, getting a passport may be too expensive. It is harder for the poor to take the time off their jobs to arrange to replace lost birth certificates.
Additionally, the poor transparency of the prepaid card contracts is a further penalty.
These fees tend to be lower than those on commercial prepaid cards. But critics question why there are any fees at all, particularly when the recipients do not have a choice.
“To me, it’s a terrible thing to give people their pay on a card that has fees on it,” said Linda Sherry, director of national priorities for Consumer Action.
Reloadable prepaid cards hardly existed a decade ago. Then, as credit cards surged and the Internet bubble lifted the economy, a handful of companies noticed an untapped market in teenagers who wanted to shop on the Internet, but were not eligible for credit cards. But it soon became clear that the larger market for prepaid cards was people who do not use banks and the uncreditworthy.
In the years since, dozens of companies and banks have latched on, some offering celebrity branding to lure customers. Johnny Cash, Usher, Carmen Electra and the football player Vince Young have all had their name attached to a prepaid card, and the hip-hop impresario Russell Simmons continues to back the RushCard, mainly to African-Americans, as a “better alternative” than banks and credit cards.
But these efforts are not without controversy. Mr. Simmons, for example, has batted down repeated criticism that his card saps money from low-income users. His Pay-as-You-Go card has come under scrutiny for charging a $19.99 activation fee deducted from the cash first loaded onto the card; a $1 convenience fee for the first 10 purchases every month; and a fee of $1 for every bill paid with the card.
Fees Are Declining
Industry officials say fees have been declining, especially after Wal-Mart this year trimmed fees on the MoneyCard Prepaid card it sells, which prompted several other issuers to cut prices too. They add that consumer complaints are rare and that surveys indicate the vast majority of customers like the cards.
An industry-sponsored study by Bretton Woods, a bank advisory firm, said that cards like Green Dot, Wal-Mart and NetSpend are cheaper than a checking account, whose annual cost can be as high as $353, assuming six overdraft charges, compared with $207 for a direct-deposit prepaid card.
Yet in many instances, even the lowest-fee prepaid cards can cost more if consumers are able to avoid bank overdraft fees. That should get easier after several large banks announced recently they would let customers decline overdraft protection.
While most major banks charge $10 or less a month for a low-balance checking account, a survey of two dozen prepaid cards released in August by the Consumers Union, the publisher of Consumer Reports, found that the cheapest, the Wal-Mart Money Card, cost $16.59 in the first month and $21.54 in the second.
By contrast, the most expensive card, the Millennium Advantage card, cost $115.05 in the first month, because of a $99 application fee, and $27.95 the second month, the survey, compiled by Michelle Jun, a lawyer for Consumers Union, showed.
And the actual fees charged can be confusing. A spokesman for the Millennium Advantage card said that while it lists the $99 fee, the company charges only up to $30. A spokesman for the Silver card said that it does not actually charge the $25 shortage fee shown in its fine print, and is working to remove it from company documents.
“How are consumers supposed to keep the fees straight if the companies can’t?” said Michael McCauley, a spokesman for Consumers Union.
In the meantime, bewildered by opaque terms and often dodgy customer service, many consumers are fending for themselves.
Damon Saxton, 34, said he had given up on prepaid cards and hoped to return to a bank, if they will have him. Mr. Saxton began using a prepaid card after being barred from getting a bank account for cashing a check from an eBay sale without realizing it was fake.
But Mr. Saxton, who lives in Florida, said that the two years he used his Vision Premier Prepaid Visa Card were marred by petty fees and horrible customer service.
Mr. Saxton said that when he punched the wrong code into an A.T.M., the bank charged him $2.95 for a declined A.T.M. transaction. When he called to complain, he said, they charged him an additional $1.95. When someone got hold of his card number and racked up several hundred dollars in shortage fees, Vision Premier covered the fees with Mr. Saxton’s tax return, which was directly deposited onto the card, he said.
A spokesman for the Vision Premier said Mr. Saxton’s experience was not the norm. The company eventually refunded the fees.
“I wasted countless hours dealing with this problem, not to mention the stress,” Mr. Saxton said. “I think the whole business is based around nickel and diming.”
The poor need basic checking accounts and debit cards that aren't larded with invisible fees. They have a right to be able to access basic financial services without being effectively taxed on every transaction. Even if prepaid debit cards are cheaper than having a bank account - and note that the results of the Bretton Woods study are sensitive to the assumptions on the number of overdrafts incurred - $207 for a single person making $20,000 (not much above poverty) is paying 1% of their income to these predators. Middle-income people have the slack in their budgets to live with whatever fees and penalties they incur - poor people don't. Bank regulators and policy makers need to look at this issue.