There’s no doubt that prepaid cards are growing in popularity. Only 11% of consumers used them just two years ago, and not only has the number since grown to 15%, but we’re also seeing big-time celebrities like Lil Wayne, Suze Orman, and George Lopez sign up as endorsers, highlighting the growing mainstream appeal of these products. While some of the best prepaid cards can be cheaper to use than a checking account for certain folks, reaching this conclusion can also be quite difficult. In short, prepaid card fees are out of control, and the problem needs to be fixed.
I’m not talking about the cost of these fees, but rather their sheer number and lack of a consistent naming convention. Prepaid card issuers are known for both charging what seems like a million different fees and calling them by different names in order to hide the true cost of their products.
For example, the Suze Orman Prepaid Card charges 20 different fees, including a “Bill Payment Fee – Paper Check,” a “Bill Payment Fee – Expedited/Same Day Payment,” a “Bill Payment Fee – Check Copy,” a “Bill Payment Fee – Check Re-Issue,” a “Bill Payment Fee – Payment Inquiry,” and a “Bill Payment Fee – Postal Reject.” How are we supposed to compare this card to the Capital One Prepaid MasterCard, for example, which charges four fees, none of which are called “bill payment” fees.
We aren’t, and that’s by design. Prepaid card issuers want our heads to spin when trying to decipher the cost of their products. It’s pure psychology. A bunch of little fees don’t seem as bad as one or two bigger ones, even if they add up to more. Take the response from one of the participants in a recent focus group on prepaid cards conducted by the Pew Charitable Trusts Health Group for example:
I’d prefer to pay the $3.95 [that it costs to load some prepaid cards] than have to deal with the things that I know that people go through with their checking accounts. … Nobody wants to pay extra fees. If we had to, I’d take the $3.95 any day over the $35 overdrafting [fee].
Also, the issuers know that most people won’t take the time to add up all of the different fees that apply to their average usage and will instead simply get whichever card they’ve heard of most. In other words, the current system makes a prepaid card company’s marketing budget more important than the money it spends developing the best (and least expensive) products for consumers.
This isn’t a new problem either. We wrote about the issue of runaway prepaid card fees three years ago and called for regulators to step in and aid consumers. Fast forward three years and nothing has changed. Private companies are still left to draw attention to the issue, suggest solutions, and wonder why regulators aren’t doing their jobs. It’s time for the Consumer Financial Protection Bureau (CFPB) to step up and make prepaid cards more consumer friendly instead of letting companies hide behind confusing product offerings.
How can they do so?
Well, if it were up to the Center for Financial Services Innovation (CFSI), the CFPB would adopt a uniform fee disclosure box that standardizes the design and content of prepaid card fee schedules. Consumers would therefore know exactly where to find the most important information related to any prepaid card offer, which would make comparison much easier.
Two of the most important facets of the CFSI’s recommendation are its calls for simpler language and more thoughtful disclosure design. “About half of the adult population in the United States reads at or below an eighth-grade education level. When disclosures use terms that consumers do not understand, they tend to ignore them,” the CFSI prepaid card study reads, before going on to say, “Organizing information into clearly defined lists or tables with categories and plenty of white space could improve comprehension.”
And while the Center for Financial Services does not recommend limiting the number of fees a prepaid card company can charge or limiting the flexibility issuers have in naming these fees, I do. Don’t get me wrong, issuers can charge whatever they want, but they don’t need 20 different fees to do so. Odds are that all prepaid card issuers can make do with the same four fees: 1) Activation Fee; 2) Monthly Fee; 3) ATM Fee; 4) Transaction Fee. This would make it abundantly obvious which are the most and least expensive cards, but hey, that’s only fair.
Ultimately, it’s just clear that regulators have forgotten a few of their principal roles: fostering competition, leveling the playing field among card issuers, and creating a transparent marketplace. It’s unfortunate that they haven’t yet acted, but that’s what second (or third) chances are for, isn’t it?
[Disclosure: Some of the links within this article point to CardHub.com, which is owned by the same parent company as Wallet Blog.]