John D. Copeland
Prepaid credit cards resemble ordinary credit cards, but they act like debit cards. Consumers front-load the cards with cash and use the cards for purchases. Banks issue the cards with the logos of major credit card companies - such as Visa, MasterCard and Discover - but sell the cards through independent companies.
Major prepaid credit card companies include GreenDot, Financial, Pay-As-You-Go, MiCash and Pay-O-Matic.
The prepaid credit card industry markets to the 80 million Americans whose low incomes, bad credit ratings or illegal immigration status makes obtaining bank accounts difficult.
Increasingly, the prepaid credit card industry appeals to young people through celebrity branding. Tennessee Titans' quarterback Vince Young, actress/model Carmen Electra, and rhythm and blues star Usher entice young Americans - some 25 million between the ages of 13 and 19 - to use prepaid credit cards.
Unlike the recent regulation of credit cards under the Credit Card Accountability, Responsibility and Disclosure Act of 2009, the prepaid credit card industry remains unregulated.
In three years, prepaid credit card buys grew to $117 billion a year from $8 billion. Green Dot Financial recently opened 35,000 prepaid credit card reloading outlets in pharmacies, grocery stores and electronic stores. MasterCard estimates the industry will soon reach purchases of $257 billion a year.
The prepaid credit card industry advertises convenience and lower fees than traditional checking accounts. Officials also claim the cards teach fiscal responsibility to consumers without bank accounts and that they bring users into the economic mainstream.
Advocates do not tell users that the cards, unlike bank accounts, do not earn interest on deposits and do nothing to improve the user's credit rating.
According to bank advisory group The Bretton Woods Committee, prepaid credit cards are cheaper than checking accounts only if a checking account owner writes more than six overdrafts a year.
Controversy follows the industry growth.
Criminals sometimes use prepaid credit cards for money laundering. After Hurricane Katrina, the federal government gave each hurricane victim $2,000 in prepaid credit cards. Unfortunately, thousands of nonvictims fraudulently got ahold of cards.
The greatest controversy, however, involves the excessive fees prepaid credit card companies charge users. Although the industry markets cards to those with low income or poor credit ratings, the companies make huge profits at no risk.
In 2009, a joint investigation by the New York Times and Public Broadcasting Service program "Frontline" exposed abuses in the prepaid credit card industry. The companies get their money upfront and charge card users multiple fees. According to the Times and "Frontline," the card companies blindside card users with the fees.
MiCash's prepaid MasterCard charges users an immediate $9.95 activation fee and a $4 monthly maintenance fee. Each ATM withdrawal costs $1.75 and an ATM balance inquiry costs $1. Every card purchase carries a 50-cent fee. Failure to use the card during a 60-day period costs $2.
The Usher MasterCard charges a $15 activation fee and a monthly fee of $4.95. It costs $3.95 to reload the card.
Pay-As-You-Go's card charges a $19.99 activation fee. The company gets a $1 convenience fee on the first 10 purchases made with the card each month and a $1 fee for every bill paid with the card.
Millennium Advantage charges the highest fees of any prepaid credit card company. It costs $99 to apply for the card. The company, however, says it usually only collects $30. The card carries a second-month fee of $27.95.
Kent McEldowney, executive director of San Francisco-based Consumer Action, estimates that as much as 20 percent of the supposed value of a prepaid credit card goes to fees.
Besides profiting from fees, prepaid credit card companies make money off unused balances left on cards. David Robinson, publisher of industry newsletter The Nilson Report, estimates 17 percent of balances typically go unused.
Credit card companies whose logos appear on the prepaid credit cards also profit. Visa, Discover and MasterCard receive 5 cents to 20 cents every time a card with their logo is used.
While Congress so far ignores the industry and its questionable practices, plaintiffs' lawyers do not. One online legal service offers complaint forms for use by consumers to get free evaluations of possible lawsuits for prepaid credit card abuses.[[In-content Ad]]
John D. Copeland, J.D., LL.M., Ed.D., is an executive in residence at The Soderquist Center for Leadership and Ethics and a retired professor of business at John Brown University in Arkansas. He's also a Kallman executive fellow at the Center for Business Ethics at Bentley University in Waltham, Mass. He can be reached at jdcethics@gmail.com.
