The real cost of prepaid debit cards

In a time of renewed scrutiny for the banking sector, many are fighting against the tide. For consumers, managing their finances has never been so difficult - which could be why the use of prepaid debit cards is on the rise.

Now though, reports of hidden fees have brought the industry into question - raising significant concerns for one of the banking sector's fastest growing products.

It's easy to see where the attraction of prepaid cards come from, however. For many people currently embroiled in the eye of the financial crisis' storm, opening a bank account, or getting a credit card, is nothing short of impossible.

Now, by simply walking into any major drugstore in America, consumers can pick-up a plastic card worth $25, $100 or even $500. Brandishing perks such as "No Credit Check Needed," the plethora of products on offer then allow shoppers to simply pay for the card at the cash register before using it for ATM withdrawals, to make purchases in store and for online shopping.

Too good to be true

However, for all the convenience that the prepaid cards seem to offer, there also seems to be a major snag to the set-up. That's because charges on the cards are hidden well within the fine print of the accompanying literature, meaning they are often overlooked all together.

The charges aren't massive, but incremental. Often they cover things such as $1.75 for each ATM withdrawal, $1 for each ATM balance inquiry, 50 cents for each purchase, $4 for monthly maintenance, and the like; but, over time and usage, these soon add up - making the otherwise lucrative method of banking actually one of the most expensive.

The biggest concern of all is related to the growth of the industry. A decade ago, prepaid debit cards were barely in use, today they are the most attractive option to the roughly 80 million consumers who have little or no access to bank accounts.

Now the market has really sunk its teeth into the likes of American college students - who do not want to carry around wads of cash - and low-income people and immigrants who have fewer financial options than other Americans.

Regulation

What's more, with the industry being relatively new prepaid cards are yet to undergo the Congressional and regulatory scrutiny that credit and debit cards have gone through.

Now, while Congress turns to regulators in a bid to determine whther or not prepaid cards should warrant the same protections extended to debit and credit cards, the industry's trade association warns these measures are unnecessary and would make cards more expensive.

Nonetheless, consumer advocates warn that a continued lack of regulation would mean that prepaid card users would only remain blindsided by hidden fees, and have few legal protections to recover their money.

Like this article? Get the RSS feed: