Few prepaid cardholders know their rights
Prepaid debit cards are becoming increasingly pervasive and important to millions of Americans, particularly those who don't have formal banking relationships. These unbanked individuals use the cards much like traditional checking accounts.
Over the past two years, general purpose, reloadable prepaid debit cards have seen usage soar some 50 percent with one in every 11 adults using a prepaid card at least once a month, according to a new report by the Pew Charitable Trusts. While the bulk of the growth has been among people with bank accounts, about one-quarter of all prepaid card users have no other banking relationship, according to the Pew study.
The cards can be a viable alternative to those who don't want -- or can't get -- a checking account, experts note. Like traditional checking accounts, money loaded on general purpose prepaid debit cards is often protected by the Federal Deposit Insurance Corp., which insures consumer balances to $250,000 per account.
Additionally, if a prepaid card is lost or stolen, most issuers will replace it -- and restore your balance -- as long as you report the loss or theft promptly.
Unfortunately, few people know that their cards offer these significant protections, according to the Pew research.
To determine how familiar consumers were with the protections afforded by their cards, Pew asked each survey participant to note what card they used. Pew then researched the terms and conditions for those products to check the accuracy of the consumer answers.
Just over half (51 percent) of the unbanked consumers correctly knew their cards offered liability protections that would allow them to recover some or all of their money if a card was lost or stolen. But 44 percent incorrectly assumed if they lost the card, they were out of luck. Among people with traditional banking relationships, 67 percent knew their prepaid card came with fraud protections.
However, the overwhelming majority of cardholders -- 88 percent of those without other bank accounts and 74 percent who have other banking relationships -- had no idea their card balances could be protected by the federal government's deposit insurance agency.
Notably, most prepaid card issuers offer the option of FDIC insurance. But it's available only if you register the card in your name. That's because FDIC protection insures individuals, not products. When you register, you connect an owner's name and address to the balance, which triggers the FDIC coverage.
Prepaid products aren't required to offer FDIC protection, however. So, before loading a large sum on one, it's smart to check the terms and conditions.
Ironically, while fewer unbanked consumers knew about the possibility of FDIC protection, the bulk of them -- 74 percent -- do register their cards. Just 52 percent of the consumers who have other banking relationships bothered to register their cards.
The unbanked group appears to use the cards as a bank substitute, regularly reloading their debit cards, checking the balances on a daily or weekly basis and using their cards to make everyday purchases, according to Pew. Why don't these individuals just get bank accounts? Many used to have banking relationships but dropped out of the traditional banking system, said Susan Weinstock, director of Pew's banking project.
"Most unbanked customers have been pushed out of the banking system because of overdrafts," she said. "This underscores the need for the Consumer Financial Protection Bureau to make sure that overdrafts don't knock them out of this market, too."
The CFPB has proposed rules for the prepaid card industry that would standardize some practices, including how card issuers must deal with point-of-sale transactions when the consumer doesn't have enough in their account to handle the purchase. The CFPB rules also would provide more robust disclosures. Those rules are likely to go into effect late this year or early in 2016, Weinstock added.
Not surprisingly, nearly three-quarters of the unbanked cardholders say they got their debit card to avoid overdraft fees and that they would much rather have a transaction declined than have to pay a fee to allow it to go through.
