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Prepaid cards give alternative to credit cards, banks

FORT LAUDERDALE, Fla. ó When it comes time to pay, more Americans are turning to prepaid debit cards. They look like credit or gift cards, can be reloaded with money and don’t require the holder to keep a bank account.|By Doreen Hemlock, Sun Sentinel

FORT LAUDERDALE, Fla. ó When it comes time to pay, more Americans are turning to prepaid debit cards. They look like credit or gift cards, can be reloaded with money and don’t require the holder to keep a bank account.

Some shoppers say they like prepaid cards as a way to stick to a budget and avoid overdraft fees at banks. Some also find the cards better safeguard their funds and information when they buy online.

But there are problems too. Some prepaid cards charge hefty fees. Some are inconvenient to reload. And the cards have less government regulation than credit cards, critics say.

Nationwide, the prepaid card business is booming, partly because rising fees on checking accounts are prompting customers to seek alternatives, said Mercator Advisory Group of Boston.

The amount of money that consumers loaded on their prepaid cards jumped from $12 billion in 2008 to $42 billion last year and likely will top $70 billion this year, Mercator said.

Kimberly Elder, a part-time employee at a Kmart in Hollywood, Fla., said she finds the prepaid cards so easy to use that she recently closed her bank account.

Elder said Kmart now loads her pay directly onto her prepaid card. She has no overdraft fees. And if problems arise, customer service is better with the companies that issue her cards than her former bank.

“They don’t give you a whole run-around and have you send in your life story,” said the 27-year-old mother of two. “And I paid a lot more in fees to the bank than I pay now.”

Elder and other consumers buy prepaid cards mostly at stores, such as check-cashing outlets, groceries or big-box retailers such as Walmart. The cards generally carry logos for MasterCard and Visa, because they can be processed on those financial platforms. The biggest U.S. issuer is Green Dot Corp. of Monrovia, Calif., which works with Walmart and other big chains.

Green Dot reported 4.1 million cards active at mid-year, more than double the number three years ago. Quarterly revenues rose 27 percent to $115 million, with profits about steady at $12.1 million, the company said.

Not everyone is satisfied with prepaid cards, however.

Connie Frazier, a retiree in Hollywood, said she bought cards recently to budget her money, but found it difficult to find places to reload the ones she bought. Plus, it cost up to $5 to add money.

“Maybe I just got the wrong card,” said Frazier, 55. “I thought they’d be more convenient, but I found they’re not.”

Other customers choose to use prepaid cards only for specific purposes, such as buying online.

Azfar Ali, 28, who co-owns a grocery store in Hollywood, prefers prepaid cards for Internet purchases, so that information from his credit card or bank account can’t be stolen. He loads his prepaid cards with small amounts for specific purchases. He transfers the money to the cards from his bank account, with no fees paid on the electronic transfer. If someone steals his card data, there’s little money to access.

“It’s a lot safer,” said Ali, who has been using the prepaid cards for a decade.

Financial reforms are also fueling growth. Congress last year moved to cap fees that banks get from merchants every time a debit card is used. But prepaid cards are not affected, so more banks are expected to launch or expand prepaid products.

American Express unveiled its first prepaid card for consumers in June. And many big national banks, including Bank of America, are mulling prepaid cards.
But smaller banks aren’t piling in. BankUnited, the largest bank based in South Florida, said it has no plans for the prepaid consumer cards, which would likely require too big an investment to offer directly, said Pamela Kohl, senior vice president at the Miami Lakes, Fla.-based bank.

Companies see growing opportunity for prepaid cards among people with no bank account.

There’s also expanding market for people with bank accounts who just want to budget better, Mercator said. Some parents, for example, like to give prepaid cards to children in high school or college, so the students won’t run up big interest payments on credit cards or overdraft fees at banks, said Brent Watters, a senior analyst at Mercator’s prepaid advisory service.

The big concern for consumers, however, is limiting fees on prepaid cards. Companies commonly charge to activate and reload the cards. Activation may run $5, reloading at least $3, and ATM withdrawals can run $2 or more. Fees can be reduced with direct deposit of pay checks or minimum use monthly, as with checking accounts at banks.

Some consumer advocates say the government can do more to monitor the burgeoning industry.

The Florida Attorney General’s Office in late May announced a civil investigation into five prepaid debit companies for possible deceptive and unfair practices. None of the five are based in Florida.

The probe came after consumer complaints about hidden fees. Investigators also want to check if some companies misrepresented their ability to improve credit scores for card users, officials said.

Under scrutiny are Green Dot, First Data Corp., Account Now, Netspend Corp. and Unirush Financial Services, which was founded by hip-hop mogul Russell Simmons. Green Dot has said it discloses fees and welcomes the inquiry.

The Center for Financial Services Innovation, a Chicago-based nonprofit, wants the government to require prepaid card issuers to list all fees consumers pay in a “standardized box” that would allow customers to better compare fees from one card to another.|

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