Consumer protections and prepaid debit cards may come along together

Friday, May 25th, 2012

The Consumer Financial Protection Bureau is considering new consumer protection for prepaid debit cards. It is planned to increase financial protection and make fee disclosures more transparent. The agency will seek comment from the public and experts on protection from unauthorized transactions and on how fees are disclosed.

Prepaid cards often come with fees of every sort and kind: from consumer service calls to ATM use. According to users’ reports (a study by Javelin Strategy and Research), they pay an average of about $2 every time they want to reload money on their cards. And that is important for a product that is mostly used by Millennials and consumers whose annual income less than $15,000.

Those fees in many cases aren’t obvious and can add up quickly after consumers purchase the card. Protections for those cards are also not the same as for credit cards. The agency wants to make sure that the products are consumer-safe and that prepaid card managers do not make money by gambling on tricks and reaps. Prepaid cards were used by 11% of consumers in 2010, 13% in 2011 and it is expected to grow by more than 40% in the next two years (according to Mercator Advisory Group).

The cards are mostly used by unbanked and under-banked consumers. Users load money on the card and use it like a traditional credit card. These cards attract new customers and a lot of credit companies exploit them to replace lost revenue by tightening restrictions on debit cards fees.

No matter that some issuers of prepaid card voluntarily provide protections, the consumers tend to use retailers, which are less regulated than banks, to obtain the cards.

There is a ray of hope that federal credit card regulations would be extended to prepaid cards, especially the rules that protect consumers from liability on charge errors and stolen cards, and prohibit credit card-type overdraft features.

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