The Ladder

A Blog from New America's Asset Building Program

Bad Actors Draw Attention to Prepaid Debit Cards

Published:  December 10, 2010
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Is it me or have the Kardashian sisters unwittingly drawn attention to the excessive fee structure of many prepaid debit card. It was only a few short days ago that the reality “stars” launched their branded pre-paid debit card product to get their piece of the burgeoning market, which is primarily comprised of people without accounts or with poor credit, which includes many young people. Given that card issuers have used celebrities (like rap mogul Russell Simmons) and even fictional characters (yes, you can get a card graced with the stars of the Twilight movies), the Kardashians were likely surprised by the negative backlash and the threat of legal action over their card’s “pernicious and predatory fees.”

It seems like ever financial magazine, website, or column has covered the saga. The hoopla has helped draw attention to the underlying problem with these cards and raises the question of what standards we should expect of these products. After all, in theory they can work pretty well meeting the needs of those without basic transaction account products. The problem emerges when many of these products are loaded up with hidden fees.

Sen. Menendez (D-NJ) has been promoting legislation that would mandate full disclosure of fees before purchase, impose fee limits, and guarantee FDIC insurance. These reforms would be constructive. But if you think there’s no way for the new Congress to work together to solve this problem, there’s another way the marketplace can be tamed—through the new Consumer Financial Protection Bureau. The CFPB has the authority to regulate the prepaid card market to make sure it is fair for consumers.

This begs the question of what standards we should expect of these products. After all, in theory they can work pretty well meeting the needs of those without basic transaction account products. Prepaid cards have the potential to be safe alternatives to traditional transaction accounts. And actually, we are seeing a convergence of features between cards and accounts, which include ATM access, reloadability, savings pockets, and FDIC protection.

To help us wade through the issue of prepaid card standards, our colleagues at the National Consumer Law Center have published a paper outlining the elements of a safe, basic prepaid account product. It is a very instructive piece, but here is their bottom line:

Efforts to reach the unbanked will only succeed if these basic accounts have low barriers to entry, offer sufficient functionality to meet consumers' needs, are affordable, and are free of the minefields that have driven many out of the banking system.

Sen. Menendez has already reached out to the Kardashian sisters to help him highlight this message. Maybe he can work out a guest spot on their show.

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