Rising fees have chased millions of people away from banks and into prepaid debit cards.
In just a handful of years, prepaid cards have become the fastest growing payment method in the U.S. Just recently, American Express became the first mainstream financial company to offer a prepaid card.
But the cards have problems of their own, including complex fee schedules, few of the consumer protections afforded to bank and credit card customers and no ability to build credit history.
Consumer advocates are raising concerns and demanding more oversight, and at least one state is investigating prepaid card issuers. The Consumer Financial Protection Bureau is expected to step up oversight of the industry when it launches in July.
"People are using prepaid cards as checking accounts, and the government ought to regulate it similarly," says Suzanne Martindale, staff attorney for Consumers Union, a nonprofit advocacy group that is concerned about unfair prepaid card fees.
Americans spent $140 billion using prepaid cards in 2009, according to the latest data available from the Federal Reserve. That's a 21.5 percent increase each year over four years. The amount of money loaded onto the cards is expected to reach $552 billion in 2012 from $330 million three years ago, according to Mercator Advisory Group, a research firm.
Prepaid cards have gone mainstream by catering to the ranks of the unbanked -- people who don't have a bank account. Nearly one in five Americans are unbanked, a 2009 government report found, and the number is growing.
Prepaid cards can be used to pay bills or buy merchandise in the same places a bank-issued debit card can be used. So it's no wonder prepaid is the fastest growing method of payment over the last five years. This year, the IRS issued tax refunds on prepaid cards to about 600,000 bank account-free households. Social security payments for the unbanked have been loaded onto prepaid cards since 2008. And a growing number of small companies pay employees using the cards. Recently, American Express joined the fray. The card giant launched a prepaid card in an effort to expand its customer base.
Most new prepaid card customers are seeking refuge from new and escalating fees, consumer advocates say. Among them: $3 to print an account summary at a Bank of America ATM; $12 a month for checking accounts with balances below $1,500 at Chase and Bank of America; overdraft fees of $35 that most banks charge.
"Even the smallest fee can upend the world of people who are functioning on a break-even basis," says Rachel Schneider, vice president at the Center for Financial Services Innovation, an organization that works with nonprofit and government groups to look for solutions for the unbanked. "It could mean not having the $2 fare to catch the bus to work."
Pioneering the push to prepaid cards are companies such as Green Dot Corp., NetSpend Holdings Inc., Mango Financial and SmartyPig. They sell cards mostly through big box retailers like Walmart or at supermarkets and drugstores. The cards come with a Visa or MasterCard logo, and most allow people to use the cards to pay bills online.
Several $35 overdraft fees over a three-month period left Erin Gamboa's checking account $200 in the red. With her budget too tight to absorb that and other mounting bank fees, the divorced, single mother of two moved her financial life to Green Dot in February. Now, her $850 bimonthly paycheck is deposited directly onto a prepaid debit card. She uses the card to pay for everyday purchases and to pay bills online. She gets a daily text showing her account balance.
"This is just convenient," Gamboa says.
Card issuers make money in two ways. They charge fees to customers to activate, reload and maintain the cards. Merchants also pay a fee every time a card is swiped to make a purchase.
The fees prepaid card customers pay can add up quickly. Activation fees to secure a card can average $5, but at least one provider, Millennium Advantage, has charged $99.95 according to the nonprofit group Consumers Union. After that, customers typically pay $3 to $10 each time they load the card with cash.