Prepaid debit cards, an increasingly popular financial product sold at drugstores and other retail or online outlets, can serve as a cost-saving alternative to checking accounts for some consumers, the Pew Charitable Trust said in a report released Wednesday.
However, the largely unregulated cards contain significant fees, some of which are not disclosed, that can take a big bite out of consumer pocketbooks, the nonprofit research organization concluded.
Prepaid debit cards are sold with logos from Visa, MasterCard, American Express and Discover. They function much like debit cards and can be replenished. Cardholders have access to money at ATMs and can use the cards for purchases. But unlike debit cards, the prepaid cards aren't attached to bank checking accounts.
Pew reported that the prepaid card industry is expecting rapid growth. In 2009, $28.6 billion was placed onto reloadable prepaid cards in the United States, and that figure is
expected to reach $201.9 billion in 2013, researchers said, citing a Mercator Advisory Group study.
The new report, called "Loaded with Uncertainty: Are Prepaid Cards a Smart Alternative to Checking Accounts?" examines the financial advantages and disadvantages of using the cards, compared with traditional checking accounts with debit cards.
Pew researchers found that some consumers who pay few debit and checking account fees would pay more in fees by using prepaid cards rather than checking accounts. But many consumers could actually save money because the card fees would be lower than banking fees, especially a $35 overdraft fee that many banks charge for payments with insufficient funds using debit cards or checks.
But even when the cards appear to offer a financial advantage, Pew said, it's difficult to tell which of the dozens of prepaid cards offer the best deal for consumers. The wide variety of fee disclosures makes comparison shopping difficult, Susan Weinstock, a Pew project director, said during a webinar for journalists. The cards can impose between seven and 15 different fees, most for $3 or less, she said.
Another concern about the prepaid cards is that, unlike bank accounts, the cards are not regulated by consumer protection laws and money is not necessarily guaranteed by the Federal Deposit Insurance Corp., Weinstock said.
The new study isn't Pew's first examination of prepaid cards. Last year, the organization conducted focus group surveys of card-users in Chicago and Houston. Consumers said using the cards, as opposed to cash, allowed them to control spending and budget more effectively. Many said they were concerned about fees and unaware of the lack of consumer protections for the cards.
Card users in those focus groups generally opposed the idea of offering a loan option, saying it could make it easier to overspend, while they supported the addition of tools to establish a savings account.