Prepaid Cards May Be Getting More Consumer-Friendly

The Consumer Financial Protection Bureau proposed regulations Thursday that would make prepaid debit cards safer to use and easier for consumers to understand. People who use prepaid cards often use them as an alternative to checking accounts, debit cards or credit cards, but those products offer much better consumer protections than prepaid cards.

For example, under the proposed regulations, if a prepaid card got lost or stolen, the consumer wouldn’t be responsible for more than $50 of unauthorized transactions — if they report the loss soon after learning of it. As things are now, prepaid card holders aren’t guaranteed those protections, though credit and debit card users are. (To be clear, credit and debit cards have different consumer protections, though there have been legislative efforts to make them comparable.)

There are two areas pertaining to prepaid cards the CFPB is targeting with these proposals: consumer protection and consumer education. These products often carry a variety of fees and don’t come with regular statements, making them difficult for customers to use confidently and properly.

The CFPB has three proposals concerning prepaid card protections. First, card issuers would be required to make regular statements or online summaries of card activity easily accessible to cardholders, free of charge. Second, financial institutions would be required to investigate errors reported by cardholders. The third proposal requires card issuers to cover unauthorized card activity in excess of $50, as long as the fraud is promptly reported. These protections would be available only if the cardholder has a registered account with the issuer.

The other two proposals concern a cardholder’s understanding of the product they use. There is no standard for prepaid card disclosures, not only making it difficult for consumers to comparison shop but also making it a challenge for consumers to understand the consequences of using the cards.

The CFPB proposes two forms — a long and short version —that would “concisely and clearly” explain account information, particularly the many kinds of fees often associated with prepaid cards. For people considering prepaid cards, they should be able to compare terms among different products, so the CFPB proposes requiring financial institutions to post prepaid card agreements on their websites for comparison shoppers to reference.

Prepaid cards offer conveniences like ATM withdrawals and online shopping, and even though they look like credit cards, they serve very different purposes. There are credit cards available for consumers with bad credit, as well as secured credit cards — both of which can help build a consumer’s credit, while a prepaid card cannot. (You can see where your credit scores stand for free on Credit.com.) However, for people who don’t want to use credit cards at all, used wisely, prepaid cards can be a good alternative to both credit cards and cash.