Non-gift prepaid debit cards no bargain

We’ve reported on this a number of times before, and it is time to say it again:  Non-gift prepaid debit cards are not covered by the fee limitations imposed on gift cards by the Credit Card Act of 2009, and issuers are free to load up as many fees as they wish, and many do.

As the Wall Street Journal reports (Drawing Benefits Via a Debit Card?  There’s a Fee for That, 5/14/11) banks seem to be prepared to use prepaid debit card fees to make up for lost fee revenue from normal debit card interchange fees.

The combined regulatory changes for credit and debit cards are expected to cost financial firms about $26.2 billion a year in revenue, according to R.K. Hammer, a credit-card consulting firm in Thousand Oaks, Calif.

Richard Davis, U.S. Bancorp’s chairman, president and chief executive, said last month that prepaid debit cards and other products will help the company recover roughly half of the revenue likely to be lost from swipe-fee rules being written by regulators.

Keep in mind that fees on most of these cards are already high:

PNC Financial Services Group Inc. subtracts 50 cents from the unemployment benefits of Indiana residents every time they check their balance at one of the Pittsburgh bank’s automated teller machines. Recipients also get just one free cash withdrawal per week; other cash withdrawals cost $1.25.

Wow! It gets worse.  Prepaid debit cards are allowed to charge you for overdrawing your balance, which is reminiscent of the debit card overdraft gold rush which just got outlawed by federal laws.  Who in the world would expect a prepaid debit card to allow charges beyond the available balance.  Even more so than normal debit cards, consumers expect exactly the opposite, which makes these fees a real blind-side.

Given a choice between prepaid gift cards that have highly regulated (and reasonable) fees, and prepaid debit cards that are already saddled with a myriad of fees and more to come, the prepaid debit card industry would surely find a cold reception from consumers.

But states and the federal government seem to be charging full speed ahead on issuing benefits, tax refunds, and other government to consumer money transfers via prepaid debit cards and they don’t appear to have made much effort to negotiate reasonable fees.  Furthermore, some states officials were involved in lobbying for the prepaid debit card exemption from the new rules on swipe fees:

Last year, 10 state treasurers successfully prodded lawmakers to shield prepaid debit cards from part of the Dodd-Frank financial-overhaul law that limits so-called “swipe fees” charged to retailers.

The bottom line is that these cards are no bargain for consumers.  If you are unfortunate enough to get one, do your best to get all the money off of them immediately before the fees put a substantial dent in the balance.