Uncle Sam wants you to have a prepaid card, and he's not the only one.Â¶ The Treasury Department is sending letters to 600,000 people this week encouraging them to sign up to receive their tax return on a new government-issued prepaid card as part of a pilot program to help those with limited access to bank accounts. Â¶ On the other end of the spectrum, reality TV star Kim Kardashian's namesake prepaid card failed just weeks after its launch. She and her sisters were shamed into bowing out because the card was riddled with high fees. Â¶ Can these really be the same products? The world of prepaid cards has exploded in recent years, transforming from a way for teenagers who are too young to carry plastic to shop online into a replacement checking account for the millions of households that don't use traditional banks. It is one of the fastest-growing segments of the financial services industry, with the amount of money loaded onto the cards expected to double over the next three years to $670 billion. Â¶ That has captured the attention of policymakers and celebrities alike as they seek to tap into the potentially lucrative market of unbanked consumers and push the boundaries of what a prepaid card can - and should - do.
Companies now issue paychecks via prepaid cards, unemployment and government benefits are directly deposited onto the cards, and consumers can use them to pay bills online. Demand for the cards is expected to grow in the wake of new federal regulations that have forced many banks to raise fees on checking accounts, putting them further out of reach for many low-income consumers.
Prepaid cards function like debit cards: Users load money onto them and then can spend only what they have. However, there are often several fees. Consumers might have to pay for the card itself and then cover a monthly maintenance fee. Charges often are assessed for loading more money onto the cards, checking balances, out-of-network ATM withdrawals and even customer service calls.
Prepaid card providers say fees are necessary to cover the cost of administering the cards, particularly because they cater to a population considered to have a higher credit risk. But some lawmakers have called for tighter restrictions on the cards, which industry groups lobbied to exclude from several key pieces of legislation aimed at boosting consumer financial protections.
A bill from Sen. Robert Menendez (D-N.J.) would ban many fees and require more transparent disclosures of those that remain. "The industry can still make money . . . but it can do so in a way that's fairer to the consumer," he said.
Menendez said he has spoken about the issue with Elizabeth Warren, who is working to set up the new federal Consumer Financial Protection Bureau. He introduced the bill last year and plans to submit it again this session. It is co-sponsored by Sens. Richard Durbin (D-Ill.) and Jeff Merkley (D-Ore.)
The wide range of fees and protections associated with the cards prompted the Treasury to propose new rules for prepaid cards loaded with government benefits, the most rapidly growing category. The rules, which take effect Friday, prohibit using cards that can carry a line of credit. The cards must also provide the same consumer protections as bank accounts, and the money on the cards must be insured by the Federal Deposit Insurance Corp.