Prepaid Debit Road Test: Paying up front to get ripped off

October 18th, 2009. By Hunter West

Tyrell Blocker is a young fella with a family and doing the best he can. At 20 he has a newborn and all the responsibilities to go with it. 

What he doesn’t have is a bank account. He only has one piece of ID. The bank requires two, so what’s a young father to do? Head to the check-cashing place and hope to escape with the majority of your pay in your pants once you pay the fee. Or just maybe there is another way… 

Oh! But there is, says the prepaid debit card industry to the 80 million Americans who are classed as unbanked or underbanked. Just bring your paycheck to the Green Dot kiosk, or MiCash, or NetSpend, or AccountNow. Wal-Mart has one. 

Our boy Tyrell hooked up with Pay-O-Matic in Manhattan. Took his paycheck and bought a Pay-O-Matic card. Note that it’s HIS money on the card. The card is worthless until it’s pre-loaded with the client’s cash. Aside from operating the storefront, printing the cards and owing anywhere from a nickel to 20 cents to the owner of the logo that emblazes the card, card providers haven’t a whole lot to lose beyond any loss associated with a bounced paycheck or overdraft. 

But still, is that risk enough of a reason to charge more than two-dozen fees? That’s how many there are tagged to the Pay-O-Matic card. Poor Blocker didn’t know what hit him. As soon as he noticed the balance dropping like a rock every time he used his Pay-O-Matic card, even if he didn’t actually buy anything, he high-tailed it back to the kiosk to ask what the *@$% was going on. It was only then they told him there were more than two-dozen user fees associated with his card. 

Sure, it’s there in the fine print. But who reads the fine print? And who has the balls to say to a customer, “oh, by the way, there’s a fee every time you use it, there’s a fee if you don’t use it, there’s a fee just to find out the fees you’ve been docked, and there’s a fee for customer service.” 

“Have a nice day.” 

Okay, so I go in to buy a MiCash Prepaid MasterCard. I figure I’ll road test a prepaid debit card just for the fun of it. Unlike a regular MasterCard there is no credit associated with the card. There is no $10,000 limit I can charge up to. The card company is not putting any capital on the line beyond providing the card and having a fund to cover overdrafts. If I want a $100 limit on my card, then I have to provide the $100. 

Let’s say I do that for my kid who’s away at college. $100 isn’t much, but it’ll buy you a cab to someplace warm and a hot meal if your world suddenly falls apart around you. 

So I fork over $100—and it’s cash, okay? No paycheck that could bounce, so there is no risk for the card company. None, nada, zippo. It’s my money. 

Guess what? There’s a $9.95 activation fee. Okay, that’s one time. Then there’s a $4 ‘monthly maintenance’ fee. 

For what? 

If you don’t use it for 60 days, there’s a $2 inactivity fee. Come again? You have to pay THEM for NOT using your OWN money? 

Nice. But they WANT you to use it, you see. They want to see you spend your own money. It’s good for the economy. Very good…for you and for them.  Each time the card is used at the ATM for a withdrawal there’s a $1.75 fee. When you buy something, there’s a 50-cent fee for each purchase. 

And if you just want to check for a balance inquiry at the ATM just to see how much you have left (which any responsible person would do) it’s going to cost you $1. It will also cost you a dollar for each call to customer service. 

Perish the thought if you ever exceed your balance. The Silver Prepaid MasterCard advertises that it does not charge for overdrafts (many debit cards do). However, in the fine print it allows itself the option of charging you a $25 shortage fee. 

“It’s a very expensive way to bank,” said Jean Ann Fox, director of financial services at the Consumer Federation of America, in the New York Times the other day. 

I’ll say. 

Tell me, who’s the dumb ass that allowed these to exist? Where is the regulation? Where is the fairness? 

Okay, I have a credit card. And I have it because I happen to have a bank account, one that costs me about $16 a month. If I shopped around I could get that down to $10. Now with my credit card I have a $10,000 limit, there is no annual fee and while the interest rate is a whopping 19 percent if I maintain a balance, as long as I pay that balance off the card costs me zip. They make their money—as they should—on the carried balance. But I have control of that. 

Which is the way it should be. 

Now I can easily afford the charges that prepaid debit cards charge. But I don’t need a prepaid debit card. 

The people who need them, can’t afford them. But that hasn’t stopped a basketful of companies lining up to get into the queue to provide them. And it’s a growth industry. 

It’s not just people who don’t have banks (at 80 million). It’s also college students, like my daughter, who don’t want to carry cash around. Or anybody who doesn’t want to make a purchase by injecting a credit card number into cyberspace. 

So the prepaid card industry is salivating. Given the fees they are allowed to earn in comparison with the risk they take, little wonder they’re drooling all over the floor. 

Hell, I’ll start my own card. The Hunter Card. I’ll just do up a bunch of cheap plastic cards, do a licensing deal with one of the big boys to acquire use of their logo, plunk my grandson in a kiosk in the mall to sell them, have a small slush fund for overages, then run the whole thing out of my basement via computer and the internet. 

Even better, I’ll make sure it’s a smart card with a programmable chip so if it tries to withdraw, or buy something beyond what is left on the card, the card won’t work. I won’t need a slush fund then. Plus I can charge $25 just for the attempt to spend more than you have. 

Why not? 

Industry officials say the cards are a good deal because users can avoid the fees charged on low-balance bank accounts and at check-cashing stores, according to a joint investigation by the New York Times and the PBS program Frontline. 

“If you look at these products today compared to even a checking account, many consumers have found that they can be far less expensive,” said Gary Palmer, chairman of the Network Branded Prepaid Card Association. 

Yeah, and tell that to Mike Henry, who owns a small print shop in California. He wasn’t able to recover $50 stuck on his Only 1 Visa prepaid card after it stopped working. He gave up after numerous calls to customer service—at 95 cents each. Only 1 continued to send daily updates of his balance as it was eaten away by monthly fees. His account was finally whittled to zero. 

He got his fifty bucks back after making some noise, but it’s the principle. 

According to the New York Times, Congress has been sniffing around—at one point asking regulators to gauge if prepaid cards warrant the same degree of protection as debit and credit cards. The industry’s trade association responds by saying adding layers of regulatory protection would make the cards more expensive. 

However consumer advocates take the opposite view, saying that lack of regulation will ensure that prepaid card users will continue to be hit with user fees. Devoid of regulation, there is no one to tell them to stop. 

There’s even confusion over fees amongst the card supplier rank and file. While the Millennium Advantage card denotes an activation fee of $99, a spokesperson told the New York Times / Frontline that they never charge over $30. Silver Prepaid Mastercard, meanwhile has the $25 shortage fee in the fine print, but a spokesperson points out that Silver never actually charges the fee. 

What does Consumers Union think of that? “How are consumers supposed to keep the fees straight if the companies can’t?” they say. 

Indeed. And why do they even need to charge fees at all?

Tags: AccountNow, Green Dot, MiCash, Millennium Advantage, NetSpend, Only 1 Visa, Pay-O-Matic, Prepaid Debit Cards, Silver Prepaid Mastercard

This was posted on Sunday, October 18th, 2009 at 4:23 pm and is filed under Financial . Feel free to respond, or trackback. Read our comments policy.