Banks exist to give consumers a safe place to keep their money and they also make money using depositors’ funds to make loans and charge interest and other fees.
It is the money-making aspect of banking that has consumer advocates worried, however, that those least able to afford massive fees or understand a myriad of complicated rules will take a big hit as the major banks move into a lucrative industry it has previously ignored – prepaid debit cards.
The cards help low-income and “unbanked” consumers who either do not qualify for a traditional banking account, or who cannot afford one, but who need a credit or debit card for routine business transactions.
Part of the thinking behind the cards would be that they help consumers build a credit history. In addition, because they are working with liquid assets and can only use what they have, the consumer won’t have late fees and defaults on their records.
But the banks don’t report data on prepaid cards with the credit bureaus, so consumers can’t build a credit record.
Because the prepaid cards have less government oversight and have a reputation for high fees, banks see an opportunity to recoup money the industry has lost to tougher financial regulations imposed under the Dodd-Frank financial industry reform law.
But Dodd-Frank contained a loophole that allowed banks to impose high fees on merchants when customers used prepaid cards to pay for merchandise instead of credit cards.
Already the cards can be costly. According to the Center for Responsible Lending (CRL), many prepaid card distributors charge a fee to sign up, to deposit money, to check a balance or to cancel.
Still, the Washington Post reported Thursday, Mercator, a consulting firm, predicted that Americans will put $200 billion on reloadable debit cards this year, up from more than $28 billion in 2009.
And the banks see an opportunity to use the prepaid cards to gradually bring customers into traditional banking, where fees for various products and penalties for overdrafts can be hefty.
The CRL recommends that before getting a prepaid card, consumers should be sure about whether they plan to use the card mostly for purchases or cash advances or as an alternative to a credit card or checking account. They should then read the fine print on the fees associated with those types of transactions.
According to a list of tips on the site, the CRL warns, “Be especially careful to avoid a costly feature some lenders offer that allows a prepaid card holder to overdraft, but for a fee carrying a triple-digit interest rate.”
It may well be that a debit or credit card is a better option.
The site also provides links to recent news stories with tips on what to look out for, as well as a link to a new report by the National Consumer Law Center on prepaid cards that hurt those receiving unemployment compensation.
It isn’t that banks necessarily look for ways to hurt consumers; it is that they tend to be singularly focused on the bottom line, which may be worse.
Jackie Jones, a journalist and journalism educator, is director of the career transformation firm Jones Coaching LLC and author of “Taking Care of the Business of You: 7 Days to Getting Your Career on Track.”