NYT and Frontline Tag-Team Prepaid Debit Cards

The New York Times and PBS’s Frontline have a terrific story this morning on prepaid debit cards, yet another way the financial-services industry is screwing consumers, especially poor ones.

This piece is just really well done, the second day in a row the Times has had a standout business story.

Prepaid credit cards, not to be confused with gift cards, are plastic that can be loaded and refilled with cash. They’re largely used by poor people and immigrants who don’t have or can’t get bank accounts, the Times says. Consider them subprime checking accounts. The poverty business rakes in huge fees with these things.

It’s been pretty widely reported that gift cards are a very bad deal (don’t do it, people!). But I can’t remember seeing anything on prepaid debit cards. This could be why:

Because it is a relatively new industry, prepaid cards have not undergone the Congressional and regulatory scrutiny of credit and debit cards. In the spring, lawmakers restricted interest rate increases and hidden fees on credit cards, and regulators are now examining stricter rules on overdraft fees on checking accounts. Even gift cards, which expire when the money runs out, will soon be subject to new rules limiting monthly fees and expiration dates.

The Times doesn’t say why these things, which are after all a form of debit card, aren’t regulated like debit cards. It does say the industry is expected to zoom from $8.7 billion last year to $119 billion in two years. That means the press needs to pay close attention to this business.

This is one of those times you really rue the dismal state of business reporting on the local level (Before you flame me, I’m talking generally here. There are notable exceptions). It would be great to see metro papers report on some of the prepaid-debit companies in the story in their area: Green Dot, NetSpend, AccountNow, Pay-O-Matic, Only 1, RushCard, Vision Premiere, um, Walmart—I just don’t know if they have the resources to do it anymore.

RushCard, promoted by hip-hop mogul Russell Simmons, has fees like these:

His Pay-as-You-Go card has come under scrutiny for charging a $19.99 activation fee deducted from the cash first loaded onto the card; a $1 convenience fee for the first 10 purchases every month; and a fee of $1 for every bill paid with the card.

But the fees in this next part aren’t really clear:

The cards are part of a larger universe of plastic that includes prepaid phone cards and gift cards, payroll cards and government benefit cards. Industry officials are particularly excited about the explosive growth from government agencies and companies as they replace paper checks with prepaid cards to save money. Social Security payments are now offered on prepaid cards to retirees without bank accounts, and many states do the same with welfare payments. Wal-Mart recently said it would pay employees only on prepaid cards if they did not have a bank account for direct deposit.

These fees tend to be lower than those on commercial prepaid cards. But critics question why there are any fees at all, particularly when the recipients do not have a choice.

“To me, it’s a terrible thing to give people their pay on a card that has fees on it,” said Linda Sherry, director of national priorities for Consumer Action.

What fees? The Times doesn’t say how much they are or if the Social Security Administration is charging fees on its cards or if it farms them out to somebody who does. That information should have been in here.

But the paper does well to slap down industry spin on how much their products cost compared to traditional checking accounts:

An industry-sponsored study by Bretton Woods, a bank advisory firm, said that cards like Green Dot, Wal-Mart and NetSpend are cheaper than a checking account, whose annual cost can be as high as $353, assuming six overdraft charges, compared with $207 for a direct-deposit prepaid card.

Yet in many instances, even the lowest-fee prepaid cards can cost more if consumers are able to avoid bank overdraft fees. That should get easier after several large banks announced recently they would let customers decline overdraft protection.

While most major banks charge $10 or less a month for a low-balance checking account, a survey of two dozen prepaid cards released in August by the Consumers Union, the publisher of Consumer Reports, found that the cheapest, the Wal-Mart Money Card, cost $16.59 in the first month and $21.54 in the second.

The Times sidebar does report that fees appear to be falling.

And here’s a story I’d like to see:

A cottage industry only 10 years ago, reloadable prepaid cards have tapped into the vast pool of about 80 million consumers who have little or no access to bank accounts

More typically, it comprises low-income people and immigrants who have fewer financial options than other Americans. Often, they turn to these cards because they cannot open a bank account, or they become fed up with the costs of check-cashing stores or overdraft fees on checking accounts.

I think we’ve got a major problem when 80 million Americans have “little or no access to bank accounts,” whatever that means exactly. Sounds like a fertile area for investigation, no?

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.