Prepaid Debit Cards Protected By Issuer
Prepaid debit cards are a popular alternative to traditional checking accounts and for many Americans, who may not qualify for credit, they offer consumers the option of not having to carry cash and can be used for online shopping that requires the use of a credit or debit card for purchases.
The cards are typically backed by credit card companies with a MasterCard or Visa logo and can be purchased at grocery stores, big box stores like Target and Walmart, pharmacies, Best Buy and a host of other stores. They can be given as gifts with a set amount for one-time use and they can also be purchased as reloadable cards. The reloadable cards operate more like a checking account and consumers can make deposits in the stores, and get their paychecks loaded on their card through direct deposit. There are fees associated with both of these options.
Prior to 2009, legislation regulating fees, term and conditions for prepaid credit and debit cards worked in favor of the card issuer and offered little protection for consumers who saw the money they were given as gifts and/or their salaries and savings being eaten by the card issuer in ridiculously expensive monthly fees and transaction fees. It seemed there was a fee for everything. Add to the fact that the cards, if lost, could not be replaced and could be used by anyone who had the card in their possession.
That changed in 2009 thanks to the Credit Card Accountability Responsibility and Disclosure Act (CARD) signed into law by President Barack Obama. Before the CARD Act, consumers had little protection against financial institutions who could:
- Raise interest rates at will and without your notification or consent. This was left to the discretion of the institution and had a loophole that allowed a “retroactive” rate of interest to be applied to past purchases. Many who were affected by this faced financial ruin as interest rates piled on and kept those trying to get out of debt in the cycle.
- Charge outrageous overdraft fees by approving purchases that go over the card limit. There was no cap on these fees, so they could far exceed those of traditional bank accounts.
- Offer consumers “fee harvesting cards.” These are traditionally reserved for those with credit challenges and need a credit card to rent cars and the like. The cards only serve to make the financial institutions richer by charging high interest rates on credit cards with low credit limits.
This year, a new law was passed to give prepaid card consumers even more protection. As of April 1, 2019, the Consumer Financial Protection Bureau gave prepaid account holders the same federal protections given to traditional credit card and checking account holders. The cards and services protected under the new law include apps like Venmo and PayPal, prepaid debit cards, payroll and government benefit cards, digital wallets, and cards issued for tax refunds. It does not protect prepaid Visa, AMEX, MasterCard and others like them that have a set limit. It also does not cover any kind of transportation debit card, disaster relief benefits cards or other types of gift cards.
In order to fully exercise this benefit for cards to which the law does apply, consumers must register the card with the issuing institution. This process is similar to opening a bank account and the consumer’s personal identifying information is attached to the card. This law, especially, seeks to offer those who are financially disadvantaged protections from unfair costs and interest. As a result, companies are required to do the following for all card holders:
Make sure consumers are aware of all costs and fees associate with their card by placing this vital information on the back of the card’s outside packaging so consumers can compare before purchasing in stores. For the cards bought online, the financial institution’s website must have this information easily accessible.
Each institution must be either FDIC insured or have some other form of consumer protection insurance to pay cardholders out their existing balance if the institution goes bankrupt.
- Cardholders who have registered their cards should be able to access their accounts for free. While the law doesn’t require these companies to issue regular statements in paper form, but customers have a right to be able to access at minimum 12 months worth of transactions for free.
- Registered account holders have the right to dispute any charges and discrepancies. The financial institution must confirm or deny the discrepancy within 10 business days. Only crediting the account for the error make take longer than the 10 days.
- Registered account holders can report a lost or stolen card and be guaranteed protection against fraudulent charges less $50 if the card is reported missing within two days. After that period, additional fees can be assessed.
The law also provides special considerations for prepaid cards with a credit component attached:
- Overdraft option available after 30-days
- As with checking accounts, card holders must opt-in to services like overdraft protection. The card issuing company cannot sign cardholders up for any services without their consent.
- Card issuers must provide each cardholder with a monthly statement of debits, credits and fees.
- Card issuers can charge fees to accounts that have overdrafts, but only after 21-days. After the 21 days, any fees assessed by the card issue must be “reasonable.”
Fees can be assessed for using the card features. However, these fees cannot be more than 25% of the initial card limit.
Overall, the new law will bring more transparency to the prepaid card market and prevent financial institutions and businesses from taking advantage of the poor and disadvantaged who use them s alternatives to regular bank accounts.
There is, however, one exception: merchant cards. These have their own set of regulations and fees that often are in opposition to the new laws governing prepaid cards backed by AMEX, Visa and MasterCard. The fine print on these cards does contain information that may affect card balances. Many of these that go unused for six months accrue a monthly “maintenance fee” that ranges from $3.50 to $5.00, reducing the card’s value. Retailers and merchants are issuing these cards in place of cash refunds to minimize their personal revenue loss, but they pass this loss onto the consumer who was displeased with their product or service.
The reason more businesses are are going this route is to absolve themselves of the charges associated with doing credit or debit card refund and the costs associated with producing and mailing traditional paper checks. The card issuers also love this alternative because it presents them with potentially millions of new customers whom they will target with aggressive marketing campaigns.
This alternative has consumers upset because upon return, they are not forewarned the card is coming, especially if they opt to accept a mailed refund. Without knowledge the card is enroute, consumers are at greater risk of theft. Since the cards are generic with no identifying information attached to them, whomever has the card in hand can use it.
Linda Sherry, a spokeswoman for the advocacy group Consumer Action remarks at how easily this can happen. “It could be lost or stolen, and you wouldn’t be any wiser. You might just think your credit card was refunded and not give it another thought.” She also says that consumers also assume that these cards will never expire, but that is not true. They do and consumers must contact the issuer to send a new card that will have to be activated.
Do you have any thoughts on Prepaid Debit Cards being protected? Contact us for more information! Feel free to shoot us an email to Outreach@ConsiderTheConsumer.com, find us on Twitter, Facebook, Instagram, LinkedIn, or even connect with us directly on our website!
About the Author: Aisha K. Staggers is a writer, lecturer, and co-host and producer of “All Our Own” radio show and podcast and co-host of “Staggers State of Things” on the Dr. Vibe Show. Her work has been featured on MTV News, HuffPost, Blavity, Atlanta Blackstar, For Harriet, New York Review of Books and a host of other first-run publications and syndicated outlets. Find her on Twitter @AishaStaggers. For more of her work, check out her page here!
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