Prepaid Cards Are 'Risky' and Loaded with Fees, Pew Study Finds

By Jennifer Liberto @CNNMoney

A new study on prepaid cards found that they carry "significant risks," including lots of undisclosed fees, according to a nonpartisan Washington think tank.

Most of these cards carry between 7 and 15 different kinds of fees, according to Pew Charitable Trusts, which reviewed 52 cards that represent 75% of the market. And that market is going gangbusters. In 2009, consumers loaded $28.6 billion on to prepaid cards. Next year, consumers are expected to load $201.9 billion onto the cards, according to the report.
Reloadable prepaid cards work like debit cards, except they don't require a bank account. Users can load money onto them and use them anywhere debit or credit cards are accepted. Prepaid cards tend to serve those with bad credit or questionable immigration status, and can typically be reloaded with cash at major retailers like Wal-Mart (WMT) or CVS (CVS). In some areas, especially lower-income neighborhoods, there are more places to reload a prepaid card than there are bank branches. But they're also used by consumers who do have bank accounts and want to ensure they're not spending more than they've earned, said Pew director Susan Weinstock.

Pew found that fees on prepaid cards ranged between $.50 and $9.95, and that it's often unclear to the consumer when they'll be triggered. There are fees charged just to acquire and activate a card, monthly service fees and fees for talking to a customer service representative, to name a few. And some fees are less likely to be disclosed, such as a fee that's often charged when a purchase is declined, the report said.

Generally the report found that prepaid cards offer few of the same consumer protections afforded to bank accounts, such as deposit insurance guaranteed by the Federal Deposit of Insurance Corp.

"Consumer protection gaps make prepaid cards risky," Weinstock said.

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Prepaid cards are considered riskier than credit cards, which are governed by a raft of new laws that require issuers to warn consumers before interest rates go up, and notify them about things like how much more debt they're taking on when they only make a minimum payment.
The Pew report also cited the lack of federal supervision over prepaid cards as a matter of concern.

"This lack of oversight could turn a potentially beneficial emerging product into a haven for predatory lenders and other unscrupulous actors," the report stated.

The relatively new Consumer Financial Protection Bureau has announced it's looking into the prepaid card market and considering rules that would force the prepaid card issuers to clarify their fees.

Pew's report did find that prepaid cards offer a better deal for the kinds of consumers who tend to rack up fees for overdrawing their bank accounts, which can cost as much as $35 per overdraft.

For a consumer who overdraws his bank account once a month, prepaid cards are less expensive. That consumer would pay roughly $22.15 in prepaid card fees, as opposed to an average of $28 in monthly overdraft fees, according to the report.

-- CNNMoney's Blake Ellis contributed to this report.