The saga of the short-lived Kardashian Kard is a worrisome harbinger. The prepaid debit card, marketed to young, financially naive fans of the Kardashian sisters, piled on an array of fees, including a $99.95 up-front charge for a 12-month card, a $1 fee to check the balance and even a $6 cancellation fee. While the Kardashians pulled out of the endorsement deal soon after publicity revealed the card to be exploitative, prepaid debit cards are the fastest growing type of electronic payment. And there is insufficient regulation to protect consumers from cards designed to be more of a rip-off than a convenience.
Last year Americans loaded $28.6 billion onto prepaid debit cards, according to the Federal Reserve. But until recently big banks hadn't much bothered with this small slice of the financial products market. Now some have started exploring prepaid cards as a way to recoup some of the revenue that will soon be lost in their debit card operations.
As part of the new federal financial reform law, the Federal Reserve is proposing a 90 percent cut in swipe fees that retailers pay when their customers use a regular debit card for a transaction. This change could cost banks much of the $22.8 billion in swipe fees they bring in annually. But prepaid debit cards, which are typically used by low-income consumers who may not have a checking or savings account, are not part of this change. This loophole means banks may encourage more prepaid card activity.
One example of a prepaid debit card on the market is the RushCard offered by Russell Simmons, the hip-hop entrepreneur. Those who sign up for the monthly plan pay $9.95 per month plus an initial card purchase price, as well as fees for checking the balance, ATM withdrawals and a paper statement, among others.
Promoters say prepaid cards help consumers avoid the high cost of check-cashing outlets, but the way the fees are structured make these cards expensive to use. Moreover, the laws and regulations that protect regular debit card holders from liability and losses for a lost or stolen card don't apply to prepaid cards. And the money loaded onto the cards is not necessarily FDIC insured like traditional bank deposits, which means a consumer has the potential to lose all or part of the card's value.
Before there is an explosion of these cards in the marketplace, each with its own confusing fees and celebrity sponsor, the new Consumer Financial Protection Bureau should take a closer look. Prepaid debit card holders should enjoy the same types of protections established for regular debit card holders.