Concerns accompany spread of prepaid cards

An exploding market for prepaid plastic cards is bringing new convenience to consumers but raising concerns that the largely unregulated products could put people at risk with big fees and inadequate protections.

Dollars loaded onto prepaid debit cards will double to $106 billion by 2016, according to research and consulting firm Aite Group, not including the growing number of payroll cards used by employers such as McDonald’s and Wal-Mart. There are already scores of options, many with colorful names such as BlueBird, Liquid, Mango and Yap.

But while prepaid cards are often used as a substitute for a bedrock checking account, they come with far fewer rules to guard against things like hidden fees. Most prepaid cards charge between seven and 15 individual fees, according to a study by Pew Charitable Trusts, including fees for live customer service or loading more money.

They’re also eager to capture some of the 30 million or more U.S. households that are unbanked or underbanked, a segment that has swelled since the Great Recession and represents more than $1 trillion in wages. Regulators have encouraged them to reach out to underserved populations.

Bertrand Sosa, co-founder of Mango Financial Inc. in Austin, Texas, calls prepaid a new form of à la carte banking, on people’s terms.

“I think in banking that really hasn’t been done before,” Sosa said. “I don’t think we’ve even scratched the surface in what prepaid is going to do to the financial service system.”

Amaris Phillips just knows the cards are convenient. The St. Paul resident, who works in insurance claims, ditched her bank checking account a few years ago over fees in favor of a prepaid card. She has a savings account at a credit union and a savings account at Mango Financial that she said earns a high 6 percent interest.

Her paycheck is automatically deposited, part to her savings account and part to her Mango card, her go-to card for daily expenses such as groceries and gas.

“I have it hooked up with my daughter online to pay her lunch money,” Phillips said. “The only gripe that I have with gas is that the card doesn’t work at the pump.”

U.S. Bank said it is getting into prepaid cards to provide options for people who haven’t banked there in the past, as well as for current customers.

So far the bank has mainly marketed the card in branches, but it is also piloting two studies and marketing campaigns in Duluth and St. Louis. It’s also marketing its prepaid “Contour Campus Card” to colleges and universities.

Some consumer advocates also want the CFPB to ban overdraft fees and any other potential credit features, saying prepaid cards should remain prepaid in order to be a safe alternative to bank accounts.

Tracy Fischman, executive director of AccountAbility Minnesota, said her organization worked hard to find a safe, affordable card for its clients. The group provides free tax assistance to low-income people, as well as savings accounts, and it started offering prepaid cards for tax refunds two years ago because clients were asking for them.

Her group now works with U.S. Bank to offer AccelaPay, a prepaid card used by many employers for payroll that Fischman’s clients can use for their tax refund, and continue using afterward. Last year 490 customers deposited their refunds on the cards. They can also put their paychecks onto the card for free.

One wrinkle: Cardholders report being charged $2 to $5 to load more money onto the cards. But overall, the response has been good, she said.

Melisa Pertile, of Minneapolis, said she just got one of the cards through AccountAbility Minnesota, which did her taxes for free. She said she expects it to make her life easier.

Until last year when she got a prepaid card through H&R Block, she had been operating on a cash-only basis. Check-cashing places charge $5 to cash paychecks, she said, and she drove around to pay bills in person.

“Who knows where that would be,” she said. “When you’re a single parent it’s kind of hard. Every little bit counts.”

Fischman, at AccountAbility, said she was originally skeptical of the cards because of the lack of regulation, but she now sees them as a tool to help people be financially secure and build assets.

The idea for Jifiti came about because Shaul Weisband — one of the creators of the app and company behind it — wanted to “teleport” gifts to friends. While teleportation is still not really possible, the team at Jifiti has done the next best thing and is aiming to incorporate this into a new way of shopping. And I think retailers are going to like it.

The concept behind Jifiti is quite simple; go shopping in a participating brick-and-mortar store and when you see an item you would like to purchase for someone, you scan that item’s standard retail barcode with your smartphone. Next, you pick a friend you would like to send the item to and a gift code is created and emailed to that friend so they can download the app, redeem the code and pick up that same item at a participating store near them.

For example, I want to buy my friend John Biggs a hat.Source buymosaic Products at Other Truck Parts. But I live in Columbus,Manufactures flexible plastic and synthetic chipcard and hose. Ohio, and he lives in Brooklyn. I go shopping at a Lids store in Columbus and I see a hat that he would like. So I scan that item’s standard barcode with the Jifiti app. I select John’s email and he gets sent a redemption code. He can then download the app, go to the nearest Lids store in Brooklyn and pick up the hat I just bought for him out of the other store’s inventory.

So why are retailers going to like this? Well,Source solarstreetlight Products at Dump Truck. obviously there is a “drive-to-store” component to the scenario. You can browse physical store items and buy them instantly for others — capture that feeling of instant gratification. However, chances are that if you are browsing in a physical store, you might pick up something for yourself. Retailers will be fond of that.

Another thing is that the mechanics behind the system is actually based on gift cards. When you scan an item and send that item to a person, you are essentially buying a custom gift card and sending that gift card to that person. It’s just that no plastic card is ever involved.Creative glass tile and fridgemagnet for your distinctive kitchen and bath. It is all worked into the app. Jifiti,Source solarstreetlight Products at Dump Truck. buys these cards in bulk at discount and is essentially reselling them, which is how they monetize. In this way, retailers will see it as an instant purchase on their books. Pretty smart.

Also, Jifiti has developed this system without altering typical store operational procedures. Retailers don’t really have to alter point-of-sale systems or anything like that. Basically, they just have to be able to process the gift card codes. This lowers the barrier of entry for retailers to get involved.