Prepaid cards are a popular payment option, with the Federal Reserve estimating that 17% of Americans own a prepaid card. And that number is bound to be much higher now with so many people giving up their credit cards and eliminating excessive credit card debt. But let the consumer beware: the security and consumer protection behind that card is not the same as with traditional debit or credit cards. Let’s examine the question, “are prepaid cards safe?”
Prepaid cards are re-loadable cards that can be used much like debit or credit cards to make payments. Prepaid cards have all of the markings of a credit or debit card, with a Visa or MasterCard logo and account number. They are favored among un-banked and under-banked consumers, who perhaps don’t qualify for credit lines, don’t have the necessary credentials for a debit card and checking account, or simply don’t trust banks.
However, even the best prepaid cards do not have the same stringent consumer protection features that credit or debit cards have, which makes the consumer more vulnerable. Though regulators seem to be in the process of changing this.
Where the Protections Are Lacking in Prepaid Cards
Prepaid debit cards have only voluntary protections that could be revised or revoked by the issuer at any time for any reason. Also, the Federal Deposit Insurance Corporation (FDIC) does not require insurance on money loaded onto prepaid cards, though some vendors choose to be backed by the FDIC. As a result, non-FDIC backed prepaid card consumers are not guaranteed full cash recovery in the event of a bank failure.
Additionally, when prepaid cards are reported lost or stolen and used to make fraudulent transactions, these cards do not have the same regulatory and statutory safeguards to recover the money. Credit and debit cards have a Zero Liability Clause that absolves the cardholder of any financial responsibility in the event of unauthorized purchases, under certain conditions.
If a normal debit card consumer reports a lost or stolen debit card within two business days, his or her own personal liability is limited to up to $50. The liability increases to $500 if theft is reported after two business days. If the cardholder takes more than 60 days to report the theft, he/she could be liable for the entire amount. Credit card liability is limited to $50 regardless of how soon it is reported.
However, with a prepaid debit card, this is not the case. It is still unclear whether the Electronic Fund Transfer Act applies to prepaid debit cards, as is mentioned in the SEC filings of Green Dot Financial. Therefore, they are under only voluntary obligation to protect you from fraud. There are also loopholes in the Visa and MasterCard Zero Liability programs that they advertise, such as exemption at ATM machines and on PIN debit transactions not routed over the Visa PIN network.
Billing disputes are also difficult since prepaid card issuers don’t offer the same consumer leverage as with standard credit card consumers. Under federal law, credit card issuers allow you to avoid paying the bill until the dispute has been settled. However, with a prepaid card, the consumer has already given up the money and has no regulatory guarantees that the money will be returned. Dispute resolution for prepaid cards is also voluntary on the part of the issuer.
Protect Yourself If You Can
There is growing pressure on the federal government to afford the same legal protections for prepaid and credit cards. Prepaid debit cards are not connected to a specific bank account, which are regulated by the Electronic Funds Transfer Act (EFTA) and Regulation E. Consumer protection also varies from program to program so there is no way to really be sure which ones are FDIC-insured.
Credit cards, debit cards, and gift cards are all slated to adopt the Credit Card Accountability, Responsibility and Disclosure Act regulations. However, prepaid cards will not. Consumer advocates claim prepaid card disclosure is feeble or non-existent, which banks and prepaid card issuers vehemently argue.
Prepaid cardholders beware: read the oft-overlooked card agreement carefully, to determine what the card issuer’s policy in the event of theft. Then take whatever they tell you with a grain of salt.
Tim Chen is founder and CEO of NerdWallet.com, a website that helps consumers to compare credit card offers. Tim also educates consumers about credit cards and debt management on the Forbes Moneybuilder Blog, Huffington Post, and Christian Science Monitor.