Dealing the cards
Uncle Sam follows the Kardashians into prepaid plastic
Uncle Sam wants you to have a prepaid card, and he’s not the only one. ¶ 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. ¶ 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. ¶ 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. ¶ 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 J. 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.
For government agencies, moving from paper checks to prepaid cards is a way to cut costs. Richard Gregg, fiscal assistant secretary at Treasury, said issuing a check costs more than a dollar. Loading the refunds onto prepaid cards costs roughly 10 cents each. With about 45 million people receiving their tax refunds by check, the pilot program could result in enormous savings.
The program will offer two cards: one with no monthly fee and one with a $4.95 charge. Treasury officials said they wanted to see how many people sign up under each model before considering whether to roll out the program nationally. Both cards carry a $2.50 fee for out-of-network ATM withdrawals and a $4.95 fee for loading cash or ordering a replacement card. They do not charge for customer service or balance inquiries, in network ATMs or direct deposits.
“We view this as an opportunity to learn,” Gregg said. “One way or another, we’re going to be moving ahead with electronic payments. What the mix is, we haven’t decided yet.”
Treasury officials also said the move toward prepaid cards is part of the Obama administration’s effort to provide more services to unbanked households. A 2009 survey by the FDIC found that a quarter of American households have little or no access to traditional banking services; they instead rely on a makeshift alternative financial system of check cashers and payday lenders, along with newer products such as prepaid cards.
Minority groups had the highest percentage of unbanked households, with nearly 22 percent of black households reporting that they do not use banks. African American radio host Tom Joyner said statistics like those are why he decided to launch a prepaid card branded with the name of his company, Reach Media. “When America has a cold, [the African American peopulation] got pneumonia,” Joyner said in an interview. After the recession, “America has pneumonia, and we’re on life support.”
The card debuted this month and includes an activation fee of $9.95 and a monthly charge of $8.95. The card also charges fees for out-of-network ATM transactions, and retailers may charge for some types of cash reloads, but customer service calls and bill payments are free.
Joyner is not the only public figure to issue his own card. Hip-hop mogul Russell Simmons has long promoted the RushCard and is encouraging users to directly deposit their tax refunds on it. The card costs from $3.95 up to $14.95 for one with a fancy pink design. The cards carry a host of fees, including 50 cents for ATM balance inquiries, $2 to enroll in bill pay and a monthly charge of up to $9.95.
The Kardashian Kard carried fees of nearly $100 a year before the card was pulled from the market. It also carried a $6 cancellation fee — which may seem like a bargain compared with the $75 million lawsuit the Kardashians are facing for pulling out of the card contract.
Talk-radio host Tom Joyner has launched a card branded with the name of his company, ReachMedia.