Nov 13, 2014 3:33 AM

How prepaid cards work and why Feds are watching

The Associated Press

NEW YORK (AP) Prepaid cards allow users to store and spend their money without tying themselves to a traditional bank. Now regulators want many of the protections that cover bank accounts expanded to this product.

The fees associated with prepaid cards have drawn scrutiny from the Consumer Financial Protection Bureau. The federal regulator on Thursday proposed expanded protections for these increasingly popular "reloadable" cards now used by some 2 million U.S. households as an alternative to traditional banks, according to the Federal Deposit Insurance Corp.

Here are the basics of prepaid cards:


A: Prepaid debit cards are typically used by people who don't want, or can't qualify for a traditional banking account. Individuals add money to their prepaid cards, and because the cards are usually tied to payment networks like Visa, MasterCard or American Express, those people can use them for day-to-day spending. People also can have paychecks directly deposited to the cards, which allow money to be added over and over.

In 2003, American consumers put less than $1 billion on prepaid cards. By 2012, that amount ballooned to $65 billion. By the end of 2014, the CFPB expects consumers to put nearly $100 billion on prepaid cards.


A: The CFPB is looking to extend protections for bank accounts to prepaid cards, including shielding customers from unauthorized charges, a fee to receive a monthly billing statement and other charges. The CFPB will allow card users to spend more than they originally put on the card, a feature known as overdraft, as long as those users opt in to the service and the issuer provides appropriate disclosure of the fees.


A: Prepaid cards are a parallel, relatively low-cost way to bank for people who cannot open a traditional account because they distrust financial firms, don't have appropriate identification, or cannot qualify to open an account. Prepaid card customers can get access to thousands of ATMs, use major payment systems to buy goods, and even use online bill pay services.

Prepaid cards are also attractive because the other options for "unbanked" people, like check cashing or money order stores, can be more expensive. Carrying cash can be risky because it is hard to trace and recover in cases of theft.


A: One word: fees. People who use prepaid cards can be charged for transactions that would usually be free at traditional banks. They could be charged a fee to withdraw cash from an ATM, even if the ATM is in their card's network. There might be a fee to set up online bill payments or a fee to reload the card. There are often limits on the amount of money that users can put onto one card. Charges can vary greatly among cards so people should shop around.

While many prepaid card issuers provide protection if a card is lost, they are under no legal obligation to do so.

The FDIC insures up to $250,000 of a customer's account if a traditional bank goes out of business. There's no such guarantee with a prepaid card. Generally, card issuers use what's known as a "custodian bank" to insure their users' accounts, but it's not like a bank where every account is covered.


A: While gift cards often use Visa, MasterCard or American Express as their payment networks, the similarities end there. Gift cards typically are not designed to have money repeatedly added and cannot be tied to direct deposit.


--  Dealing with the Disease of Addiction? Click here for help --

More from

NH1 News Debates
NH1 News Replay

NH1 on Twitter

NH1 SkyView Cameras

NH1 on Facebook

Check out NH1 News Rail Polls on LockerDome on LockerDome