Mercator Perspectives

Mainstream Media Misleads Public Regarding Prepaid Debit Cards

US News & World Report recently published an article entitled “The Perils of Prepaid Debit Cards” by Susan Johnston that identified many reasons consumers should avoid prepaid products.

This article, and too many more just like it, assumes everyone in the United States has an income sufficient enough to cover food, rent, heat and medical expenses, and can therefore maintain a balanced budget that assures a checking account will never go negative and avoid an overdraft fee. I wish I lived in that world, but I live in this world where I get charged an overdraft fee about once a year despite being able to cover all my necessities and many luxuries.

For those not living in the utopian version of the U.S. discussed by the experts at US News & World Report, prepaid products deliver a very real value proposition. Most prepaid products charge fees that are directly related to the costs associated with operating the prepaid program. This makes the fee structure predictable. For anyone that has paid a $30 NSF fee associated with a checking account going negative, prepaid is a breath of fresh air – they don’t charge negative balance fees.

The article makes fun of the fact that many prepaid programs charge a dormancy fee:

Credit card expert and consumer advocate Beverly Harzog takes issue with the SpendSmart card's $3 inactivity fee if the card sits unused for 90 days. "That's so silly [to charge a fee] because you decided not to spend your own money," she says.
Had US News & World Report talked to an actual expert, the logic of this fee could have been easily explained. Prepaid processors charge program managers for every card that is “active.” The processor must assign resources to every active card to assure that the card can be accepted at the point of sale within a network specified timeframe – typically 300 milliseconds or less. Not too surprising, it costs money to respond to one card out of millions in just three tenths of a second. Since the card operator must pay this cost even when the card is not used, they often charge a maintenance fee if the card has been dormant for a few months. The maintenance fee imposed by the card supplier is used, in part, to pay for the processor that supports the card.

But Beverly Harzog then makes a broad statement that is almost totally wrong:

And unlike traditional checking or savings accounts, prepaid cards are not insured by the Federal Deposit Insurance Corporation. "If the institution that issues that card goes under, the consumers lose all that money on that card," says Harzog. "So many people that use these cards are living month to month anyway."

The vast majority of prepaid cards that support the unbanked and underserved are covered by FDIC insurance. While the American Express card, and a very few others, are not – the vast majority are. It is sad that financial experts are willing to talk on the record about financial products they know so little about.

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