Prepaid Debit Cards: An Ongoing Investigation

 

A prepaid debit card is, as the name suggests, like a credit card but without the aspect of credit- i.e., a consumer must pay in, or load, a prepaid debit card with funds before using it to transact. Therefore, a prepaid debit card is little more than a bank card that often pays no interest (though some do). Prepaid debit cards are a relatively new phenomenon and, put simply, are largely an effect, and an extension, of ongoing issues with consumer debt, subprime lending, traditional banking, and limitations on cash in this country.

Companies issuing prepaid debit cards target those consumers who are unhappy with banking fees or, for whatever reasons, are effectively locked out of the mainstream credit and/or banking market. The most common reason for an individual being locked out in this way is simply bad credit because of bankruptcy, unemployment, foreclosure, overspending, and/or overdrafts/bounced checks. If a person doesn’t have access to mainstream credit cards and deposit-backed bank debit cards, then he or she will require either a prepaid debit card or cash to transact normally.

Some consumers, however, prefer prepaid debit cards even if they have access to mainstream banking services and decent credit. After all, banks have been known to charge exorbitant fees, including overdraft fees, while paying little or no interest on accounts. If a prepaid debit card can be utilized at a lower fee level and works the same as a deposit-backed debit card (indeed, many prepaid debit cards are MasterCard or Visa-branded), then it may even be preferable. Prepaid cards generally allow direct deposits, sometimes offering advanced access to paychecks, and work, or are supposed to work, at the same places, including ATMs, and in the same manner as other plastic.

Many, many companies now offer prepaid debit cards; some of the largest issuers include PayPal, American Express (Serve), Chase (Liquid), Green Dot, Bluebird (American Express and WalMart), Bancorp Bank (Kaiku), and RushCard, but there are many others. A basic Internet search will yield extensive descriptions and critiques of various prepaid debit cards. For example, here’s one useful site.

The purpose of this brief article is not to recommend or criticize a given prepaid debit card, or prepaid debit cards generally. Rather, it is to analyze the essence of prepaid debit cards with aspects of consumer law in mind. Very generally, prepaid debit cards represent a broad evolution in consumer credit and banking markets. They look, and are supposed to act, like other plastic cards- so what is the difference? Why are so many major (and minor) entities offering prepaid debit cards if there isn’t some profit advantage?

A very important answer to these questions, especially from a consumer law perspective, is that prepaid debit cards, as of the writing of this article, are not regulated by the Consumer Financial Protection Bureau (“the CFPB“). The CFPB, an important agency that works to protect ordinary people from financial abuses, has been monitoring the rapid growth in prepaid debit cards, however, probably with a wary eye. Put simply, consumers using prepaid debit cards are not currently offered the same regulatory protections as those using credit or deposit-backed debit cards. Essentially, prepaid debit cards currently allow banks to transfer even more risk to consumers! How? All prepaid debit card issuers do is provide consumers with a piece of plastic and access to existing payment systems. Because no credit is extended, there is no credit risk. There is no chance of overdrafts. Because consumers pay in funds, these funds can be lent out at a positive net interest margin. Meanwhile, prepaid debit cards also charge meaningful, sometimes hefty, fees while facing less regulation, such as the requirement to protect consumers from loss and unauthorized transactions. Some prepaid debit cards, whether intentionally or not, have caused consumers problems by locking them from their funds. RushCard, for example, has recently been hit by, and paid out a large amount of damages as a result of, many lawsuits because many of its users were locked from their funds for an extended period of time. RushCard is certainly not alone in this regard.

Legal issues involving the prepaid debit card market constitutes, as the title states, an ongoing investigation. This is true primarily because these financial instruments aren’t currently regulated by the CFPB, there have been some fairly high-profile issues with some prepaid debit cards, and the market is growing quickly. We would likewise suggest conducting due diligence before committing yourself to a prepaid debit card, which should certainly include thorough research of applicable terms and conditions. As always, keep as many records as possible in case you need to prove damages later. If you think that you may have suffered damages at the hands of a prepaid debit card issuer, please consider contacting the experienced consumer attorneys at Bell Law.

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