Prepaid debit cards: The new currency?

by The City Wire staff ( 49 views 

Prepaid cards have become the new currency of choice for more consumers because they offer payment privacy, according to Ben Jackson, senior analyst for Mercator Advisory Group.

He estimates $202 billion will be downloaded to prepaid bank cards this year and says it’s not all bad despite little regulation over the burgeoning financial market. Jackson recently published a report that details one of the overlooked reasons for the growth in prepaid cards and that is privacy in making payments and purchases online.

“There are plenty of legitimate reasons that someone might want to make an anonymous payment.There are three broad reasons why someone might want to avoid a traceable payment: marketing, safety and gifting,” Jackson said.

“My fiancé Chase Williams won't use his debit card to shop online, he only uses a disposable Visa card. He’s just playing it safe against hackers,” said Brandy Arena, a student a Loyola University.

Jackson said safety issues are a concern but just as many people also use prepaid cards to avoid traceability of purchases by retailers and marketers who collect transaction history to later bombard consumers with ads and offers for similar products.

“If you are not a golfer and you have bought a set of golf tees for a friend as a present, then you are not going to benefit from lots of solicitations for clubs. The same principle applies in the case of someone wanting to try a product for the first time,” Jackson notes in his report

He said the cards also work well for one-time charitable donations, like sponsoring a friend in a marathon for charity. Consumers can be overwhelmed with solicitations for nonprofits after an initial contribution, no matter how small.

“Using a closed loop card can avoid this, but the donation will likely not be deductible,” Jackson said.

There has been much written about the rapidly growing prepaid card market possibilities and Wal-Mart Stores Inc. has certainly been part of that discussion.The mega retailer partnered with Green Dot to offer the Walmart Money Card.

Last year the retailer joined with American Express for the exclusive BlueBird card which is sold and serviced in Wal-Mart’s 4,000-plus stores.

Analysts said the rise in prepaid cards has occurred as retailers and large banks sought to woo the nearly one million households that exited the banking system between 2009 and 2011. The Federal Deposit Insurance Corp reported the number of "unbanked" households rose to 17 million last year. Roughly 18% of those households used prepaid cards in 2011, compared with just over 12% two years earlier.

Big financial players such as JPMorgan Chase, Wells Fargo, PNC Bank and American Express have given more legitimacy to the industry which has been around for decades serving illegal interests and others on fringe of traditional banking services.  

The Aite Group said most prepaid-card holders earn less than $30,000 a year and are under the age of 35.

Most of the card options allow money to be downloaded electronically. Some offer FDIC insurance and BlueBird also offers check-writing privileges and direct deposit from government payroll.

Jackson said the new generation of prepaid cards have less fees and serve a wider audience than just the unbanked,

The FDIC consumer protection division notes electronic cards are a good way to get people into the banking system, if they are low cost and operate like other bank accounts. The agency also notes the industry is evolving in the right direction with the generation of  products available today.

Consumer advocates have been vocal about the lack of regulation in the prepaid industry, saying it’s no surprise the big banks want into the market given the fee restrictions placed on them with the Dodd-Frank legislation in 2010.

Standard & Poor's estimates banks saw a reduction of $7 billion a year in fees charged from debit and credit-cards after Dodd Frank, which does not address fees on prepaid debit cards.

The Consumer Union, in concert the Consumer Federation of America, is advocating for needed improvements and more oversight in the prepaid debit card industry. One area of concern is more protection to prepaid users when cards are lost or stolen or when funds go missing. The group has also asked that fees be simplified and clearly disclosed upfront when card is purchased.

So far, federal regulation has been somewhat void in this industry. But Florida’s Attorney General did launch an investigation in May 2011 among five of the largest prepaid debit card issuers.

Earlier this year Florida’s Attorney General reached settlements requiring reforms to the business practices of five of the state’s largest prepaid debit card companies, Account Now, First Data Corporation, Green Dot, Net Spend and Unirush.

The investigation centered on claims card usage would raise credit score. The settlement involved a cash payment of $115,000 each, to the Central Florida Chapter of Junior Achievement and new reforms that protect consumers by providing them with all the information they need to make sound financial decisions. (Walmart’s Moneycard and Bluebird card and several other products have never claimed to improve credit scores.)

Also in the news this week is word from New York Attorney General General Eric Schneiderman who wants to know if employees of some giant companies are being squeezed by high fees related to their prepaid debit cards given in lieu of a paper paycheck.

Wal-Mart, McDonalds, Home Depot and Walgreens are some of the retailers that pay their New York employees using prepaid cards. Schneiderman said his office is looking into the costs paid by employees of these companies to access their money.

Randy Hargrove, spokesman with Wal-Mart Stores, said Wal-Mart gives its employees a choice in how they receive their pay: direct bank deposit, prepaid debit card or a paper check. He is not sure why Wal-Mart was lumped into the group of employers who no longer offer a paper check.

Hargrove said Wal-Mart began offering the debit card payment option to its employees in 2009, and those who choose the option can get all of their money in cash at their local Wal-Mart Store without a fee. He said the card also allows one free ATM withdrawal per month.

Hargrove notes that shortly after the launch in 2009, the company met with New York Department of Labor and "shared full details about the program." 

The New York AG’s office is asking for a report of fees paid by employees or deducted from accounts as a result of payroll cards. They also are asking to see the communication between the employers and the financial institution issuing the cards.

The New York probe is one to watch given a growing number of employers are moving toward electronic payment forms.

Tyson Foods adopted prepaid debit cards in lieu of paper checks in 2011. Tyson said at the time roughly 10% of its employees were getting paper checks.

J.B. Hunt Transport did away with paper paychecks last year and has not made public comments on the issue.

NWA Newspapers, a division of the Arkansas Democrat Gazette, also adopted debit card payments last year for employees and contractors who opt out of direct bank deposit.

Newspaper contractors who chose the debit card option say it beats having to wait on a check to be mailed and the card by Chase can be used at dozens of ATMs across the region without a service fee.