Consumers who don't want or can't afford a bank account increasingly
are turning to prepaid cards -- only to find they trade one set of fees for some
that can be worse.
"It's a convenient product to get because you can load them at retail locations, and you can get one even if you can't get approved for a checking account," said Odysseas Papadimitriou, CEO of CardHub.com, a consumer resource for payment cards.
"But if you're not careful, the cost of these cards can exceed $360 per year," he said.
The use of prepaid cards -- essentially debit cards loaded with a dollar amount -- has expanded vastly in recent years.
According to data from Mercator Advisory Group, Boston, prepaid cards were loaded with about $19.5 billion in 2008. That jumped roughly fourfold to an estimated $76.7 billion last year and is expected to exceed $168 billion in two years.
The figures don't count the type of prepaid cards that a rising number of employers use to pay employees. About 4 million U.S. households have someone who receives wages on a "payroll" card, according to 2011 data from the Federal Deposit Insurance Corp.
"Banks are issuing prepaid cards because of their consumer appeal and because regulation of them is much more relaxed than on other financial products," Papadimitriou said.
The 2010 Dodd-Frank financial reforms that capped some consumer fees and required better disclosure virtually spared prepaid cards, he noted.
Employer-issued prepaid cards, called "payroll" or "pay" cards, usually are intended for groups of unbanked workers without checking accounts.
Those cards are hardly free, as a McDonald's restaurant employee in northeastern Pennsylvania discovered.
Luzerne County resident Natalie Gunshannon this year sued the McDonald's where she worked for requiring her and co-workers to accept wages on payroll cards, which carried fees that amounted to being charged for accessing their pay.
"All we want is to halt the fact that (workers) have to pay a fee to earn their money," said attorney Mike Cefalo, whose firm represents Gunshannon. The class-action lawsuit, pending in Luzerne County Court, alleges McDonald's violated state law that requires workers be paid by check or in cash.
The McDonald's franchise recently agreed to pay employees with paper checks or through direct deposit. Parent McDonald's Corp. spokesmen could not be reached.
The growth in payroll cards led New York Attorney General Eric Schneiderman to initiate an investigation this month. He is looking into whether their use by such major employers as Wal-Mart, Costco and Home Depot complies with New York law.
In Western Pennsylvania, PNC Bank issues prepaid cards to consumers and payroll cards to employers. It is "unquestionably" a growth opportunity for the bank, said spokeswoman Marcey Zwiebel. She declined to provide card volume numbers or commercial clients' names.
CardHub.com rates the PNC SmartAccess prepaid card -- with no activation fee and a $5 monthly fee -- as one of the best, most affordable prepaid cards among the 26 cards it evaluated.
First National Bank has issued payroll cards to employers since 2005 but does not issue prepaid cards to consumers, said Mark Sullivan, director of treasury management. FNB was not included in the CardHub.com study.
The average prepaid card consumers purchase at banks or retailers comes with 10 types of fees, the study said. They include fees for card activation, monthly service direct-deposit card-loading, purchase transactions, automated teller machine withdrawals and more.
Celebrity-backed prepaid cards can be the worst for fees, said Papadimitriou. His firm's study found those cards are 17 to 36 percent more expensive to maintain than non-celebrity cards.
"Those celebrities need to get paid, or maybe they just feel they can get away with it because they have a unique brand name," Papadimitriou said.
For example, hip-hop producer Russell Simmons' Rush Reward card charges $15 just to obtain the card, plus ATM access and other fees.
"Not everyone understands that some of these cards are truly service-minded and some are borderline predatory cards," said Ernie Hogan, executive director of the Pittsburgh Community Reinvestment Group in the Hill District.
Thomas Olson is a Trib Total Media staff writer. Reach him at 412-320-7854 or firstname.lastname@example.org.
(c)2013 The Pittsburgh Tribune-Review (Greensburg, Pa.)
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