The End of Cash: The Rise of Prepaid Cards, Their Potential, and Their Pitfalls

7/28/2019 The End of Cash: The Rise of Prepaid Cards, Their Potential, and Their Pitfalls

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1 Center or American Progress | The End o Cash: The Ri se o Prepaid Cards, Their Potent ial, and Their Pi talls

The End of Cash: The Rise of Prepaid

Cards, Their Potential, and Their PitfallsJoe Valenti April 4, 2013

*Correction, April 9, 2013: Te paragraph referencing JPMorgan Chases partnership with the

state of Louisiana has been updated for purposes of accuracy.

March 1, 2013, marked he end o cash or he U.S. governmen. Saring on ha dae

ederal paymens such as Social Securiy, Supplemenal Securiy Income, also known asSSI, veerans benes, and reiremen benes or ederal employees were, or he mos

par, no longer available in check orm, and insead were only made available elecronically.

In oher words, beginning in March, mos new recipiens o ederal governmen paymens

no longer receive paper checks. Tis move is expeced o save he ederal governmen $1

billion over he nex 10 years.1 No only are elecronic paymens oen less expensive o

process han paper checks, bu hey can also reduce he poenial or raud and can provide

more exibiliy o recipiens, according o he Governmen Accounabiliy Oce.2

In pracical erms, his means ha recipiens o ederal paymens have wo opions: Teycan elec o receive heir paymens by direc deposi o a bank accoun o heir choice, or

hey can use a governmen-issued prepaid card called he Direc Express Card. Tis is an

easy decision or he vas majoriy o Americans, given he ac ha hey have had bank

accouns heir enire lives and jus need o se up direc deposi. Bu or he millions o

aduls in America who do no have bank accouns, including seniors and he poor, his is

a much ougher choice. Tese individuals can open an accoun a a bank or credi union,

or hey can go wih he Direc Express Card. Consumers also have he opion o swich-

ing o anoher prepaid card i i mees cerain requiremens.

Te ederal governmens shi o he Direc Express Card is par o a broader rend

oward elecronic ransacions replacing cash and paper checks. Beginning in 2003 more

elecronic paymens were made in he Unied Saes han check paymens.3 Even envi-

ronmens where one would expec cash o be more prevalen such as on airplanes or a

ollboohs, he swich has been made o elecronic paymens. Major airlines have shied

o cashless cabins, requiring credi or debi cards or onboard meal purchases.4 Several

saes now have oll roads ha rely solely on elecronic paymens insead o cash.5 Even


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he U.S. reasury isel began moving away rom cash several decades ago, when he

iconic Cash Rooma wo-sory marble hall in he reasury building where govern-

men checks could be cashedclosed in 1976.6

Te Federal Deposi Insurance Corporaion, or FDIC, esimaes ha here are approxi-

maely 17 million aduls in America who do no have a checking or savings accoun.

Tey are known collecively as he unbanked populaion, which makes up abou 8percen o all American households.7 An addiional one in ve households in he Unied

Saes are underbanked, meaning ha hey have bank accouns bu also use nonbank

nancial services such as check cashers and pawn shops.

Many populaions mos afeced by he shi o elecronic paymens have much higher

raes o being unbanked, according o he FDIC. Nearly 1 million households ages 65

or over are unbanked, and anoher nearly 3 million are underbanked.8 Abou 8 mil-

lion American households earning less han $30,000 a year have no bank accoun, and

anoher nearly 10 million are underbanked. Tiry percen o households earning less

han $15,000 a year are unbanked, as are 22 percen o all unemployed people.9

Nearly45 percen o unbanked households previously had a bank accoun, while ohers have

never used banks or credi unions in heir lieimes.

Wihou bank accouns, he unbanked have radiionally relied on cash-based nancial

services such as check cashers, money orders, and in-person bill paymen o handle

heir ransacion needs. Bu he ederal Direc Express Card is par o a new wave o

prepaid cards ha can bring millions o unbanked Americans ino he nancial sysem

while providing remendous benes, including he abiliy o make purchases wihou

carrying cash; saving money and ime by avoiding check cashers and money orders;

paying bills elecronically; geting cash rom auomaic eller machines, or AMs, andmerchans; and living nancial lives much akin o heir counerpars who have bank

accouns and debi and credi cards.

For an increasing number o Americans, prepaid cards are already a amiliar prod-

uc. Currenly, 41 saes and he Disric o Columbia use prepaid cards o disrib-

ue unemploymen benes.10 Several saes also use prepaid cards or ax reunds,

alhough or he ime being ederal ax reunds are si ll disribued by check.

Moreover, in recen years boh radiional brick-and-morar banks and alernaive

prepaid card providers such as GreenDo and NeSpend have sold millions o prepaid

cards o consumers. Abou 3 million people wihou radiional bank accouns now

manage heir money wih prepaid cards. And according o he FDIC, ully 27 percen

o households ha once held bank accouns bu don anymore used a prepaid card in

2011and ha number is seadily growing.11 Whas more, compeiion and innova-

ion in he prepaid-card marke has mean new eaures and decreasing ees, making

he produc even more atracive o consumers.


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Ta is no o say, however, ha prepaid cards are ree o pialls, including some ha

carry high ees. Mos nooriously, in 2010 he ee-laden Kardashian Kardwhich had

an upron ee o a leas $59.95, a minimum ee o $1.50 or every AM wihdrawal, and

a ee o $1.50 or live cusomer servicewas quickly pulled rom he marke aer he

celebriies hemselves, he Kardashian sisers, wihdrew heir suppor.12 Producs on he

marke oday have improved, bu i is sill possible or he users o hese ypes o cards o

be nickel-and-dimed on ees.

Federal regulaors such as he Consumer Financial Proecion Bureau and he FDIC

have a role o play in ensuring ha an expanding prepaid secor or boh governmen

and privae cards ulimaely serves consumers needs. Tese agencies should ake

acions o ensure ha prepaid cards are sae, afordable, and ransparen, and ha con-

sumers know how o use hem wisely. Tey should also propose and enorce minimal

sandards or sae-governmen-issued cards ha are similar o he ederal governmens

Direc Express Card. And as prepaid cards increasingly resemble bank accouns, regula-

ors should look o rea hem he same way.13

Tis issue brie examines he growing role o prepaid cards in he economy, he vari-

ous ypes o prepaid cards on he marke, and he poenial benes and drawbacks o a

growing prepaid secor.

The potential for prepaid cards among the unbanked population

Since 2009 he FDIC has asked Americans naionwide abou heir banking habis as

par o he U.S. Census Bureaus Curren Populaion Survey. Under a 2005 law, he

FDIC is required o conduc ongoing surveys abou unbanked consumers and banksefors o reach hem. Te laes Naional Survey o Unbanked and Underbanked

Households esimaed ha he number o unbanked consumers increased rom 7.6

percen in 2009 o 8.2 percen in 2011.14

Unbanked consumers need better financial options

According o he FDIC survey, unbanked consumers give several main reasons or no hav-

ing bank accouns. Abou one-hird o unbanked householdswheher or no hey have

previously had an accounclaim ha hey do no currenly have a bank accoun because

hey do no have enough money. Tis is he mos common reason given. Te second-mos

common reason givenby 26 percen o households who have never had a bank accoun

and 16 percen o he ormerly bankedis ha he consumer does no need or wan an

accoun. Oher reasons given include ha he consumer doesn like dealing wih banks

or doesn rus banks and ha ees or minimum-balance requiremens are oo high. And


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abou 15 percen o ormerly banked households repor ha hey eiher previously held a

bank accoun ha was subsequenly closed by he bank or ha hey are unable o open an

accoun due o idenicaion, credi, or banking-hisory barriers.

Being unbanked has oen mean ha hese consumers rely on cash-based nancial

producs such as check cashers and money orders, which can have several consequences.

One such consequence is ha hese producs may cos more han having a bank accoun.Check-cashing ees may range rom 1 percen o 5 percen o ones paycheck or govern-

men-bene check. Beween 1987 and 2006 he cos o cashing a paper payroll check

more han doubled, and he cos o cashing a Social Securiy check increased by 53 per-

cen.15 Money orders, which can be used or paymens in place o checks, cos $1.20 each

or amouns up o $500 hrough he U.S. Posal Service; oher money-order vendors may

charge similar raes.16 Consider a low-income worker who is paid $700 every wo weeks

and needs o buy wo money orders each monh: Wih a 2 percen check-cashing ee, he or

she would pay more han $30 per monh jus or nancial services.

Beyond cos acors, being unbanked or underbanked may also leave amilies morevulnerable o loss. Consumers who rely primarily or exclusively on cash ace he risk o

he. An analysis o payday lenders in he ciy o Seatle ound ha he presence o hese

alernaive nancial-services companies, which are oen used by underbanked consum-

ers, was associaed wih increased violen-crime raes, possibly because payday-loan

recipiens carry large amouns o cash on hem.17 Moreover, wihou access o secure

mehods o saving money such as a savings accoun, unbanked consumers may have

more diculy coping wih emergencies. Roughly hal o all Americans a all income

levels would probably no or cerainly no be able o come up wih $2,000 in 30

days o deal wih an emergency, according o a recen naionwide survey by he marke

research rm NS Global. Tis lack o nancial securiy was a realiy or abou hree-quarers o hose earning less han $20,000 per year in 2009.18

Prepaid cards can create a stronger financial relationship

In he early 2000s nancial-services gians Visa and American Express launched some

o he rs prepaid cardshen called sored-value cardso enable parens o se

aside unds on a prepaid card or heir eenage children o spend.19 Tese cards were

more exible and convenien han handling cash, and hey enabled parens o rack heir

childrens spending.

Since hen prepaid-card use has grown rapidly, wih he Federal Reserve reporing 1.3

billion general-purpose prepaid-card ransacions in 2009. Tis is up signicanly rom

he 300 million ransacions ha were made in 2006.20 Prepaid cards represen a more

ormalized nancial relaionship or unbanked consumers. Prepaid-card users have access

o many o he same eaures as heir counerpars wih checking accouns, including


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wihdrawing cash rom AMs, paying bills online by debi card, making elecronic rans-

ers beween accouns, receiving direc deposis, and even deposiing paper checks using

a mobile phone. And prepaid cards have he poenial o save consumers boh ime and

money by avoiding he need o go o muliple reail oules or heir nancial ransacions.

Te usage o prepaid cards has grown signicanly among he unbanked. In 2009 only

12 percen o unbanked consumers used prepaid cards; by 2011 18 percen did.21 Andamong he previously bankedhose who once had a radiional bank accoun bu no

longer dousage increased rom 19 percen in 2009 o 27 percen in 2011.22 Tis sug-

gess ha prepaid debi cards are being used as subsiues or radiional bank accouns.

And conrary o he FDICs esimaes o an increasing unbanked populaion, i prepaid

usage is considered equivalen o having a bank accoun, he percenage o unbanked

Americans remains consan a abou 6.7 percen o all households.23 As he Cener or

American Progress noed in he all o 2012, he FDIC should consider changing is

deniion o a bank accoun o include prepaid cards.24

Clearly, prepaid cards can be a subsiue or nancial services such as check cashing andmoney orders ha could be more expensive and less appealing. And he rend seems o

indicae ha prepaid cards and bank accouns are converging. Te FDIC has even esed

a model bank accoun or unbanked consumers known as a Sae Accoun ha relies on a

card-based srucure.25

A wide variety of prepaid cards exist

Consumers may carry several ypes o prepaid cards, each o which has slighly diferen

regulaions. Te ollowing are some o he more common ypes o prepaid cards:

Government-issued prepaid cards

Governmen-issued prepaid cards have been available or more han a decade boh

o access in-kind benes such as he Supplemenal Nuriion Assisance Program, or

SNAP, and o replace cash. Fory-one saes and he Disric o Columbia currenly

use hese cards o disribue unemploymen benes.26 In 2012, six saes used prepaid

cards o disribue ax reunds.27 Cards receiving ederal bene paymens have sricer

regulaions ha make hem more comparable o bank accouns. Tese regulaions

include mandaing FDIC insurance o saeguard unds on he accoun, requiring eiher

paper saemens o show card aciviy or access o a 60-day writen accoun hisory by

reques, as well as expanded consumer proecions or los or solen cards.28

Prepaid payroll cards

A growing number o employers issue prepaid cardsknown as payroll cardso

workers who choose no o enroll in direc-deposi programs. One such employer

is WalMar, which in 2009 began issuing payroll cards o is employees.29 Similar o


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governmen prepaid cards, payroll cards have regulaions ha are more comparable o

bank accouns. Te Ciy o San Francisco has promoed model payroll cards o employ-

ers hroughou he ciy hrough is CurrenC SF iniiaive, which encourages direc

deposi bu also ses minimum sandards or paricipaing cards. Tese eaures include

no overdra ees, no monhly or annual ees, and a leas one ree bank wihdrawal and

one in-nework AM wihdrawal per pay period, as well as one ree phone call o a live

cusomer-service agen each monh.30

General-purpose reloadable prepaid cards

Tese cards are issued boh by radiional brick-and-morar banks and by oher prepaid-

card disribuors such as GreenDo and NeSpend. Tese ypes o cards have been

markeed as a way o properly manage spending and, in some cases, as a bank accoun

subsiue. Many, bu no all, o hese cards have FDIC pass-hrough insurance. In oher

words, even i he card provider is no an insured bank, he consumers card balance is

insured hrough anoher bank ha holds all deposis. Cards ha can also receive govern-

men paymens hrough direc deposi mus be FDIC-insured and mee similar require-

mens as governmen and payroll cards, bu hey do no have resricions on ees.31

Gift cards

While prepaid cards are closely relaed o gi cards, mos gi cards have more sringen

consumer proecions. Tey are no discussed in his brie. Cards ha can only be used

in one sore or a se o relaed sores are considered gi cards, no general-purpose

reloadable cards. Gi cards are subjec o provisions in he Credi Card Accounabiliy,

Responsibiliy, and Disclosure Ac o 2009, including a ban on any ees wihin he rs

year, limiaions on service ees aer he rs year, and resricions on when unds can

expire.32 Insead, some merchans now charge an upron acivaion ee or heir gi

cardsan arrangemen ha is no always atracive o consumers.33

General-purposereloadable cards mus be markeed separaely rom gi cards, bu hey someimes co-

exis on sore shelves, making i more dicul o disinguish one card rom anoher.

The state of prepaid cards today

Despie heir advanages or unbanked consumers relaive o carrying cash, prepaid

cards sill have poenial drawbacks when compared o bank accouns, as shown hrough

he examinaion o producs on he marke in early 2013.

Not all prepaid cards facilitate access to cash

Free access o deposis on prepaid cards can be surprisingly dicul. Sae-disribued

cards oen rely on a single provider and is own branch and AM neworks. Te


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ReliaCardhe card ha Ohio uses o disribue unemploymen compensaionis

issued by USBank, which has branches and in-nework AMs across he sae. Bu

unemployed Ohioans in 33 o he saes 88 counies have no USBank branches, and

in 16 counies, here are no USBank in-nework AMs. Te counies lacking USBank

access also end o be counies w ih he highes unemploymen raes.34 Louisiana

issues is sae ax reund on prepaid cards issued by JPMorgan Chase, which ofers

branches in 23 o he saes 64 parishes and ree AM access in anoher 33 parishes.Bu in he oher eigh rural parishes in Louisianasimilar o rural areas elsewhere

access can be challenging.*35

According o he Naional Consumer Law Cener, which recenly reviewed saes

unemploymen-bene cards, 18 saes wih unemploymen cards ofer a leas one ree

non-nework AM wihdrawal per monh, making bene dollars available o consum-

ers even in areas where nework AMs or branches may no exis. Bu oher saes make

i dicul o regularly access cash or ree. ennessees card, or example, ofers wo ree

AM wihdrawals per monh, bu benes are paid weekly.36 Moreover, in Missouri

and Arkansas here is no way o wihdraw unds rom accouns or ree a a eller, evenhough his is he only way o ully cash ou and obain he ull amoun le on he card.37

Similarly, wih general-purpose reloadable cards, cash access varies based on he ne-

work o which he card provider belongs. Consumers using cards issued by banks ha

have widespread branches and AMs or ha are in parnerships wih naional reailers

may easily ge cash or ree in cerain locaions. Bu some cards do no have any in-

nework AMs, and many general-purpose reloadable cards will charge as much as $2

or $2.50 or cash wihdrawals a non-nework AMs, in addiion o ees imposed by he

AMs owner. RushCard users, or example, may be charged up o $2.50 or each AM

useplus ees rom he AMs ownerno mater which AMs hey choose.38

Prepaid cards may impose fees for common services

While no an issue or governmen cards, which do no accep nongovernmen unds,

users o general-purpose reloadable cards may acually need o pay a ee when depos-

iing unds on he card. Tis process is also known as loading unds. Reloading

GreenDo cards a reailers, or example, may cos as much as $4.95 per ransacion,

alhough some cards ofer ree alernaives a cerain merchans or bank branches.39

While having more reail locaions where consumers can add money may provide added

convenience, i comes a a cos.

General-purpose reloadable cards also oen have monhly ees. Tese ees may range as

high as $9.95, bu hey are waived in some cases i a minimum amoun is loaded ono

he card by direc deposi each monhoen $500 or $1,000. Bank-accoun srucures


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are increasingly similar, as ewer banks now ofer ree checking wihou condiions.40

Banks ypically ofer producs wih a monhly ee ha can be waived i he accoun bal-

ance or direc deposis exceed a cerain amoun or i he consumer ops o orego cerain

eaures such as monhly paper saemens.

Accoun inormaion can also be hard o access or ree. Many prepaid-card providers

are successully using echnology o provide accoun inormaion, ofering eaures suchas online accoun access and ex alers. Bu or consumers no using high-ech opions,

prepaid-card providers may charge cusomer-service ees or even basic inormaion. Some

prepaid-card cusomers will incur ees even o nd ou how much is le on he card a an

AM or hrough an auomaed phone line, and many cards charge o speak o a cusomer-

service represenaive on he phone. Unorunaely, hese less-han-consumer-riendly

pracices are no limied o general-purpose reloadable cards: Among unemploymen-

bene cards, 22 saes charge or some balance inquiries a AMs, and six saes charge or

all balance inquiries, including inquiries made a in-nework AMs.41

Some products have managed to provide lower costs to consumers

Among governmen-issued prepaid cards, Direc Express mos closely resembles a

model card. Te card has no iniial or monhly ees, and i ofers one ree cash wih-

drawal per monh a more han 50,000 in-nework AMs.42 Direc Express also allows

recipiens o receive cash rom bank ellers a no cos and ofers ree balance inquiries a

AMs and ree cusomer-service phone calls. Monhly paper saemens are available or

$0.75, and recipiens can be auomaically noied when governmen direc deposis are

made and when he accoun balance is low.43

Similarly, Caliornias card or unemploymen compensaion received he highes

ranking rom he Naional Consumer Law Cener or is lack o ees.44 Consumers can

access cash or ree hrough boh in-nework AMs andor up o our wihdrawals

per monhou-o-nework AMs, as well as bank ellers. Consumers using ou-o-

nework AMs, however, may sill incur ees rom he AMs owner. Balance inquiries

and cusomer-service phone calls are always ree. Caliornia, however, does no ofer

direc deposi or unemploymen compensaion, meaning ha all unds mus be roued

hrough he card insead o giving consumers he choice o receive unds in heir bank

accouna choice ha banked Caliornians would likely preer.

Recenly, some new enrans ino he general-purpose reloadable-prepaid-card marke

have also approached ees diferenly, signaling a poenial shi away rom nickel-and-

diming consumers. American Expresss Bluebird card, launched joinly wih Walmar,

has no monhly ees a all, bu i charges or some services.45 And he Chase Liquid card

akes a somewha diferen approach, wih a $4.95 monhly ee or all cusomers bu ree


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deposis and wihdrawals a all Chase branches and AMs.46 Ofering more predicable

ees may lead o sronger producs in he uure.

The future of prepaid cards

Despie promising advances, prepaid-card ees remain a serious issue. An analysis byhe Pew Chariable russ o ypical bank-accoun and prepaid-card cusomer coss

ound ha bank accouns may oen be more economical han prepaid cards, bu his

ulimaely depends on how each nancial produc is used and which ees are incurred.47

Eiher way, hese ees are likely o be ar lower han wha check cashers and oher aler-

naive nancial providers may charge.

A he same ime, ees remain only one disincion beween prepaid cards and bank

accouns. A regular bank-accoun cusomer may be able o obain an afordable car loan,

home morgage, or oher nancial producs by virue o he banking relaionship, and

he or she may also be encouraged o open a savings accoun. I remains unclear wheherprepaid-card cusomers will be able o graduae o oher nancial producs in he same

way ha bank-accoun cusomers do. Some prepaid-card providers such as NeSpend

now provide savings eaures hrough a linked accoun, bu his is sill no a common

pracice in he prepaid-card secor.48

Moreover, prepaid cards have been used o evade consumer-proecion laws designed

o rein in predaory lending. In saes where he pracice o shor-erm, high-cos payday

lendingmaking small loans or abou wo weeks a riple-digi annual ineres raes

is banned, payday lenders have ried o use prepaid cards wih overdra eaures as a

way o skir sae law. In Sepember 2012 he Oce o he Comproller o he Currencychallenged one bank or saey and soundness concerns aer he bank was ound o be

issuing prepaid cards in his manner.49 While bank accouns have clear rules on over-

drasand consumers need o armaively give banks he power o allow overdras

and charge or hemhese sandards are sill unclear or prepaid cards, despie wha

convenional wisdom suggess he word prepaid means.

In 2011 Sen. Rober Menendez (D-NJ) inroduced S. 2030, a bill ha would creae

a new regulaory caegory o prepaid cards known as spending accouns or mos

general-purpose cards, no including nonreloadable cards o under $250. Spending

accouns would be required o have FDIC insurance, ree access o accoun inorma-

ion, and paper saemens a he cos o $1 or less. Addiionally, he bill would ban

ees a he poin o sale, overdra ees, declined-ransacion ees, in-nework AM

ees, inaciviy ees, cusomer-service ees, and accoun-closing ees, among ohers.

Overdra and credi eaures would be banned as well. Te proposed Senae bill

would also require he Consumer Financial Proecion Bureau o creae sandardized


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ee disclosures or consumers so ha hey are able o compare ees across cards.50 Te

bill did no make i ou o commitee.

In addiion o governmen regulaion, volunary moves oward improved producs have

also aken place in he prepaid indusry. Te Cener or Financial Services Innovaion,

an organizaion ha racks nancial producs or he unbanked, launched he Compass

Principles in 2012, a blueprin ha recommends a se o model pracices ha prepaidproviders can ollow o creae sronger producs. Te our principles or prepaid provid-

ers are o embrace inclusion, build rus, promoe success, and creae opporuniy.51

Te organizaion has also proposed a model ee box based on lessons rom oher envi-

ronmens such as credi-card disclosures and nuriion labels. Tis ee box would boh

provide key inormaion on ees and guide consumers o make beter decisions when

buying and using prepaid cards.52

Recommendations

Prepaid cards o all sripesgovernmen, payroll, and general-purpose reloadable

cardshave evolved o mee consumers needs wih lower coss and greaer conve-

nience han cash and radiional paper checks. Bu curren marke pracices sugges ha,

in some circumsances, prepaid cards have a long way o go beore hey are ruly aford-

able and efecive bank-accoun subsiues. Te ollowing acions are valuable rs seps

o improving prepaid cards or unbanked consumers.

Revise and enforce minimum standards for all government cards using the Direct

Express Card as a model

Governmen cards should be held o a higher sandard o ensure ha axpayer-unded

benes ulimaely go o recipiens. Tis includes clearly saing ees, ofering ree accoun-

balance inormaion, and expanding ree AM access. Direc Express ofers some o he

sronges eaures o any governmen card, while some saes cards all shor.

Saes ha conrac wih nancial-services providers o issue cards should ake ino accoun

available branch neworks o ensure ha benes are no needlessly eroded by an array o

ees. Furhermore, saes should also ofer a way o cash ou he remaining balance on a card

wihou a penaly. Tese sandards mus also mainain direc deposi as an opion. As he

Naional Consumer Law Cener indicaed in is laes repor on sae unemploymen cards,

ve saes do no ofer direc deposi o unemploymen benes, orcing recipiens o use a

single card.53 Tis is illegal. Consumers canno be orced o accep a cerain card or accoun.


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Offer comparable consumer protections for bank accounts and prepaid cards

Some bank-accoun regulaions, including deposi insurance, access o accoun inorma-

ion, and proecion or los or solen cards, already apply o governmen cards, as well

as payroll cards. o creae consisency across personal-banking producs, hese rules

should also exend o all general-purpose reloadable cards.Regulaing prepaid cards as disinc rom bank accouns runs he risk o creaing loop-holes or nancial insiuions. Consumer-ocused regulaions in general should reec

wha nancial producs acually do, no he echnicaliies o who issues hem or wha

legal saus hey hold.Requiring common consumer proecions across prepaid cardsand bank accouns no only suggess changes or prepaid cards bu also ofers an oppor-

uniy o modernize bank-accoun requiremens as well.

Prepaid cards should have standardized, transparent disclosures

Beore purchasing a prepaid produc, consumers should be able o clearly undersand heees ha prepaid cards may charge or common services such as adding money o he card

and using he card a AMs or in reail sores. Tis inormaion should be available boh on

he cards packaging and on he Inerne so as o encourage consumers o make smar deci-

sions. Whas more, hese ees should be described in plain language, no nancial indusry

jargon. Loads should no be used in place o deposis, or example, and POS should

no be used o describe cash back a merchans.54 Consumers should also know abou ees

ha can be colleced by oher companies as par o heir card usage.

Te ee box proposed by he Cener or Financial Services Innovaion is a valuable rs

sep. Based on exising disclosures or credi cards and ood labeling, he proposed eebox would include major caegories o ees, as well as clearly spelled-ou opporuniies

or consumers o reduce or avoid ees alogeher.

Monitor advertising and statements by prepaid-card providers for accuracy and

truthfulness

Some prepaid cards have been markeed as ools or building credi, even hough heir

credi-building claims may be experimenal or unproven.55 Moreover, some cards may

even carry rivolous disclosures such as ree FDIC insurance, even hough consumers

would no direcly pay or deposi insurance.56 Similarly, prepaid-card packaging in reail

sores oen includes he saemen Tis is No a Gi Card o disinguish general-

purpose reloadable cards rom gi cards, ye boh ypes o cards may be on he same

display. Given hese rends, regulaors, including he Consumer Financial Proecion

Bureau and he FDIC, should consider requiring addiional warnings o clearly indicae

wha hese cards ruly can and canno do.


12/14


Prepaid card providers should add opportunities to learn more about using

prepaid cards wisely

Managing money wih a prepaid card may be diferen han handling cash or a checking

accoun. Te ransiion o a prepaid card may be challenging or some consumers, par-

icularly or recipiens o governmen cards who have been able o easily rack expenses

using cash in he pas. One poenial educaional opporuniy being esed wih heDirec Express Card is he PayPerks iniiaive, which provides online nancial educa-

ion o cusomers wih he poenial or small cash prizes.57 I prepaid cards are ruly

inended o be a mainsream produc, helping consumers be more inormed abou heir

cards is in all prepaid providers bes ineres.

Conclusion

Nearly our decades aer he Cash Room closed a reasury Deparmen headquarers,ederal and sae governmens and privae businesses have moved away rom cash and

paper checks. In recen years prepaid cards have risen in populariy and imporance,

enabling consumers wihou bank accouns o bene rom he shi o elecronic

ransacions rom cash and paricipae in he nancial mainsream. A he same ime,

however, no all prepaid cards are creaed equal. Improving consumer proecions can

bring prepaid cards closer o heir bank-accoun counerpars, expanding access o sae,

afordable, and ransparen nancial services or all Americans.

Joe Valenti is the Director of Asset Building at the Center for American Progress.


13/14


Endnotes

1 Melissa Koide, The End o Cash, Event at the Centeror American Progress, Washington, D.C., March 1,2013, available at http://www.americanprogress.org/events/2013/02/22/54461/the-end-o-cash/.

2 Government Accountability Oce, Electronic Payments:Many Programs Electronically Disburse Federal Benets, and

More Outreach Could I ncrease Use (2008).

3 Ibid.

4 Ann Schrader, Airlines succeed with shit to cashless cab-ins, The Denver Post, May 21, 2009, available at http://www.denverpost.com/business/ci_12415434.

5 Larry Copeland, Toll roads take cashless route,USA Today,July 28, 2008, available at http://usatoday30.usatoday.com/news/nation/2008-07-27-cashless-toll-roads_N.htm.

6 U.S. Department o the Treasury, About: Treasury CashRoom, available at http://www.treasury.gov/about/history/Pages/cash-room.aspx (last accessed April 2013).

7 Federal Deposit Insurance Corporation, 2011 FDIC NationalSurvey o Unbanked and Underbanked Households (2012),available at http://www.dic.gov/householdsurvey/2012_unbankedreport.pd.

8 Ibid.

9 Ibid.

10 Lauren K. Saunders and Jillian McLaughlin, 2013 Survey oUnemployment Prepaid Cards: States Save Workers Millionsin Fees; Thumbs Down on Restricting Choice (Boston: Na-tional Consumer Law Center, 2013), available at http://www.nclc.org/images/pd/pr-reports/report-prepaid-card-2013.pd.

11 Federal Deposit Insurance Corporation, 2011 NationalSurvey o Unbanked and Underbanked Households.

12 Bill Hardekop, Kardashian Kard: The Atermath, ForbesMoneybuilder blog, November 30, 2010, available at http://www.orbes.com/sites/moneybuilder/2010/11/30/kardashi-an-kard-the-atermath/.

13 Gadi Dechter and Joe Valenti, Its Time to Regulate Prepaid

Cards as Bank Accounts, American Banker, November29, 2012, available at http://www.americanbanker.com/bankthink/its-time-to-regulate-prepaid-cards-as-bank-accounts-1054698-1.html.

14 Federal Deposit Insurance Corporation, 2011 NationalSurvey o Unbanked and Underbanked Households.

15 Jean Ann Fox and Patrick Woodall, Cashed Out: ConsumersPay Steep Premium to Bank at Check Cashing Outlets(Washington: Consumer Federation o America, 2006),available at http://www.consumered.org/pds/CFA_2006_Check_Cashing_Study111506.pd.

16 U.S. Postal Service, Domestic & International Money Orders,available at https://www.usps.com/shop/money-orders.htm(last accessed April 2013).

17 Charis E. Kubrin and others, Does ringe banking exacer-bate neighborhood crime rates? Investigating the social

ecology o payday lending, Criminology and Public Policy10(2) (2011): 435436.

18 Annamaria Lusardi, Daniel J. Schneider, and Peter Tuano,Financially Fragile Households: Evidence and Implications.Working Paper 17072 (Cambridge, Massachusetts: NationalBureau o Economic Research, 2011).

19 Marilyn Kennedy Melia, Kids Get Freedom To Spend, ButParents Keep Control, Chicago Tribune, February 20, 2001,available at http://articles.chicagotribune.com/2001-02-20/business/0102200041_1_card-companies-credit-card-cashless-society.

20 Federal Reserve System, The 2010 Federal ReservePayments Study: Noncash Trends in the United States20062009 (2011), available at http://www.rbservices.org/les/communications/pd/research/2010_payments_study.pd.

21 Federal Deposit Insurance Corporation, 2011 National

Survey o Unbanked and Underbanked Households.

22 Ibid.

23 The FDIC reported that the percentage o unbanked house-holds increased rom 7.6 percent in 2009 to 8.2 percent in2011, with the number o unbanked households increasingrom approximately 9.1 million to 9.9 millio n. Prepaid-cardusage increased rom 12.2 percent to 17.8 percent amongthe unbanked, or rom about 1.1 million households to1.8 million households. Subtracting prepaid-card usersrom the unbanked population, the increase i n unbankedhouseholds is minor, rom slightly under 8 million to 8.1million, and ater taking into account growth in the numbero U.S. households, the unbanked rate remains stable atabout 6.7 percent o all households. This is a Center orAmerican Progress estimate based on: Federal DepositInsurance Corporation, 2011 National Survey o Unbankedand Underbanked Hou seholds.

24 Dechter and Valenti, Its Time to Regulate Prepaid Cards asBank Accounts.

25 Federal Deposit Insurance Corporation, FDIC Model SaeAccounts Pilot: Final Report (2012), available at http://www.dic.gov/consumers/template/SaeAccountsFinalReport.pd.

26 Saunders and McLaughlin, 2013 Survey o UnemploymentPrepaid Cards: States Save Workers Millions in Fees.

27 Ryan Holeywell, Debit Cards Replace Paper Tax Reunds inSome States, Governing the States and Localities, June 2012,available at http://www.governing.com/topics/nance/gov-debit-cards-replace-paper-tax-reunds.html.

28 Title 12, United States Code o Federal Regulations, 205.15:Electronic Fund Transer o Government Benets.

29 Miguel Bastillo, Wal-Mart to Pay Via Check Cards, The WallStreet Journal, September 3, 2009, available at http://online.wsj.com/article/SB125193862292181741.html.

30 CurrenC SF, Recommended Payroll Products and Services,available at http://currencs.org/payroll-products/ (last ac-cessed April 2013).

31 Title 31, United States Code o Federal Regulations, 210.5:Account requirements or Federal payments.

32 Public Law 111-24, 401. May 22, 2009.

33 David Lazarus, Big banks resisting changes to overdratee poli cies, Los Angeles Times, August 13, 2010, availableat http://articles.latimes.com/2010/aug/13/business/la--lazarus-20100813.

34 David Rothstein, Testimony beore the U.S. Senate Commit-tee on Banking, Housing, Urban Afairs, Subcommittee onFinancial Institutions and Consumer Protection, ExaminingIssues in the Prepaid Card Market, March 14, 2012, avail-able at http://www.banking.senate.gov/public/index.

cm?FuseAction=Files.View&FileStore_id=7b3e544a-0d67-4ba8-a84-353269557bc4.

35 Center or American Progress analysis o the Federal DepositInsurance Corporation, Summary o Deposits data, June 30,2012; Allpoint, Allpoint Global Surcharge-Free ATM Net-work: Louisiana, available at http://locator.allpointnetwork.com/local/Louisiana/surcharge_ree_atm_locations/index.html (last accessed April 2013).

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1-02-20/business/0102200041_1_card-companies-credit-card-cashless-societyhttp://articles.chicagotribune.com/2001-02-20/business/0102200041_1_card-companies-credit-card-cashless-societyhttps://www.usps.com/shop/money-orders.htmhttp://www.consumerfed.org/pdfs/CFA_2006_Check_Cashing_Study111506.pdfhttp://www.consumerfed.org/pdfs/CFA_2006_Check_Cashing_Study111506.pdfhttp://www.americanbanker.com/bankthink/its-time-to-regulate-prepaid-cards-as-bank-accounts-1054698-1.htmlhttp://www.americanbanker.com/bankthink/its-time-to-regulate-prepaid-cards-as-bank-accounts-1054698-1.htmlhttp://www.americanbanker.com/bankthink/its-time-to-regulate-prepaid-cards-as-bank-accounts-1054698-1.htmlhttp://www.forbes.com/sites/moneybuilder/2010/11/30/kardashian-kard-the-aftermath/http://www.forbes.com/sites/moneybuilder/2010/11/30/kardashian-kard-the-aftermath/http://www.forbes.com/sites/moneybuilder/2010/11/30/kardashian-kard-the-aftermath/http://www.nclc.org/images/pdf/pr-reports/report-prepaid-card-2013.pdfhttp://www.nclc.org/images/pdf/pr-reports/report-prepaid-card-2013.pdfhttp://www.nclc.org/images/pdf/pr-reports/report-prepaid-card-2013.pdfhttp://www.fdic.gov/householdsurvey/2012_unbankedreport.pdfhttp://www.fdic.gov/householdsurvey/2012_unbankedreport.pdfhttp://www.treasury.gov/about/history/Pages/cash-room.aspxhttp://www.treasury.gov/about/history/Pages/cash-room.aspxhttp://usatoday30.usatoday.com/news/nation/2008-07-27-cashless-toll-roads_N.htmhttp://usatoday30.usatoday.com/news/nation/2008-07-27-cashless-toll-roads_N.htmhttp://www.denverpost.com/business/ci_12415434http://www.denverpost.com/business/ci_12415434http://www.americanprogress.org/events/2013/02/22/54461/the-end-of-cash/http://www.americanprogress.org/events/2013/02/22/54461/the-end-of-cash/


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37 Ibid.

38 RushCard, Prepaid Visa Cardholder Agreement, availableat http://www.rushcard.com/cardholder.aspx (last accessedApril 2013).

39 Gary Fields and Maya Jackson-Randall, Footnote toFinancial Crisis: More People Shun the Bank,The Wall Street

Journal, September 12, 2012, available at http://online.wsj.com/article/SB10000872396390444443504577601283142758856.html.

40 E. Scott Reckard, Survey nds small banks, credit unions

lead way in ree checking,Los Angeles Times, November 16,2012, available at http://articles.latimes.com/2012/nov/16/business/la--mo-bank-ees-20121115.


42 Direct Express Debit Mastercard, Frequently Asked Ques-tions, available at http://www.usdirectexpress.com/edcdt-client/docs/aq.html (last accessed April 2013).

43 Ibid.


45 Stephanie Cliford and Jessica Silver-Greenberg, Wal-Martand AmEx in Prepaid Card Deal,The New York Times, Oc-tober 8, 2012, available at www.nytimes.com/2012/10/09/business/wal-mart-to-ofer-prepaid-card.html.

46 Sean Sposito, Why Chases Liquid Prepaid Card FlowsThrough Its Branches,American Banker, May 9, 2012, avail-able at http://www.americanbanker.com/issues/177_90/jpmorgan-chase-liquid-prepaid-branches-atms-1049166-1.html.

47 The Pew Charitable Trusts, Loaded With Uncertainty: ArePrepaid Cards a Smart Alternative to Checking Accounts?(2012), available at http://www.pewstates.org/research/reports/loaded-with-uncertainty-85899415043.

48 Lesley Morgan, Paper or Plastic? The Potential Impact oPrepaid Cards on Personal Financial Management,Bridges 4(2012), available at http://www.stlouised.org/publications/pub_assets/pd/br/2012/Bridges_sp_12.pd.

49 Sheryl Harris, OCC smacks bank or issuing prepaid cardsor payday lender: Plain Dealing,The Cleveland Plain Dealer,September 24, 2012, available at http://www.cleveland.com/consumerafairs/index.ss/2012/09/occ_smacks_bank_or_issuing_pr.html.

50 112th Congress, Senate Bill 2030, Prepaid Card ConsumerProtection Act o 2011 (introduced December 17, 2011).

51 Center or Financial Services Innovation, The CompassGuide to Prepaid (2012), available at http://csinnovation.com/system/les/CFSI_CompassGuidetoPrepaid_FI-NAL_6_1_2012.pd.

52 David Newville, Thinking Inside the Box: Improving Con-sumer Outcomes Through Better Fee Disclosure or PrepaidCards (Chicago, Illinois: Center or Financial Services In-novation, 2012), available at http://www.csinnovation.com/system/les/CFSI_Prepaid%2520Cards%2520Whitepaper%2520FInal_0.pd.


54 Newville, Thinking Inside the Box.

55 Odysseas Papadimitriou, Does Suze Ormans prepaid cardsolve anything?, The Christian Science Monitor, February

9, 2012, available at http://www.csmonitor.com/Business/new-economy/2012/0209/Does-Suze-Orman-s-prepaid-card-solve-anything.

56 Center or Financial Services Innovation, The CompassGuide to Prepaid.

57 Koide, The End o Cash.
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The End of Cash: The Rise of Prepaid Cards, Their Potential, and Their Pitfalls

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