Prepaid Debit Cards are Popular However, they have their own drawbacks.
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Prepaid Debit Cards are Popular but Still Have Downsides
Written by Spencer Tierney Senior Writer | Certificates of Deposit ethics, ethical banking, bank deposits Spencer Tierney is a consumer banking writer at NerdWallet. He has written about finances for individuals since the year 2013, with a particular focus on certificates of deposit as well as other banking-related subjects. His work has been covered on The Washington Post, USA Today, The Associated Press and the Los Angeles Times, among others. The location of his work is Berkeley, California.
Aug 10, 2016
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Visit an convenience store such as 7-Eleven or CVS Pharmacy and you’re likely to see a few debit cards that are prepaid hanging on a rack.
And these payment cards, employed for budgeting and as substitutes for checking accounts have become more popular. The number of purchases on cards issued by the biggest prepaid issuers rose 15.7% in 2014 compared to 2013, according to The Nilson Report, which analyzes payment industry data.
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Despite their widespread use however, prepaid debit cards do have their share of problems. The last year, both suffered technical glitches that resulted in cardholders getting locked off their cards for up to seven days. At that point, any cash on these cards including income that had been directly transferred to them, was unavailable. However, even in the absence of extreme events, prepaid debit cards have numerous disadvantages.
Frequent fee
Prepaid debit cards typically charge fees for services you would normally get with a checking account, such as free ATM use, customer support as well as mobile and online services. And unlike checking accounts, prepaid cards often don’t offer options to eliminate their monthly fees.
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Janice Elliot Howard, a writer in Atlanta, originally got an prepaid card that would charge her a small fee every when she purchased something. After she realized how much it was costing her, she quickly canceled it and bought a card that doesn’t charge transaction fees for purchases.
The woman isn’t able to stay clear of the cost of all fees, but.
“The drawback is the ATM surcharge for cash withdrawals], however, I don’t do it often,” she says.
One of the benefits of debit cards that are prepaid is that they don’t permit overdrafts or charge overdraft fees. With a checking account you could be hit with an of around 30 or 35 cents for spending more money than you have within your accounts. However, prepaid cards’ regular fees for transactions and ATM withdrawals could be significant.
The card details may not always be clear
Elizabeth Avery bought a prepaid debit card from a pharmacy to travel overseas but then realized that the card could not be used abroad.
“I find that the fine print is where I’m seeing issues,” 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 the card at ATMs in the international market to get cash and had not found any mention on the outside packaging that it was meant for domestic use.
It’s not the only information that’s missing.
“The disclosures for prepaid cards sold at retail doesn’t need that all the fees need to be listed on the outside packaging,” says Thaddeus King, who works for the consumer banking initiative in the Pew Charitable Trusts in Washington, D.C.
There is still no protection
The debit card you use to pay for purchases, like credit and debit cards, belong to payment networks like Visa or MasterCard. As a result, you are protected against fraud for card purchases , but not the broader protections you get with an account at a bank.
“When it is about bill pay or ATM transactions, those are not processed on those networks, such as the Visa or MasterCard network,” King says.
Other payment platforms offer similar exclusions. In these transactions, King says you need to trust the disclosures of your card that might not offer security features that are different from those for purchases.
Prepaid debit cards also don’t have to be insured by FDIC. Federal Deposit Insurance Corp. Also known as the FDIC, which is how customers are able to recover their funds if their bank or card issuer is insolvent. While many prepaid issuers provide protection on their own however, their agreements with cardholders may say that the terms can change at any point.
Checking accounts, on the other hand should have greater fraud protection due to a policy that protects both electronic as well as ATM transactions. Additionally, they must be protected through the FDIC.
Good news for debit card holders with prepaid cards could be coming soon. According to the Consumer Financial Protection Bureau plans to later this year that will extend protection against fraud for these cards in line with those for debit and checking accounts.
“Prepaid debit card users should have the same protections as debit card users,” says Christina Tetreault, legal counsel at the staff of Consumers Union in San Francisco.
About the author: Spencer Tierney is an expert on deposits and certificates at NerdWallet. His work has been highlighted in USA Today and the Los Angeles Times.
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