COLUMN: How to Improve Prepaid Experiences

Article excerpt

Byline: Jennifer Tescher

Prepaid debit cards have been getting a bad rap lately, despite the fact that they are swiftly becoming the go-to product for financially underserved Americans.

General-use prepaid cards had nearly $125 billion loaded in 2009, an increase of 61% over 2008, according to Mercator Advisory Group's recent Open-Loop Benchmark Report. More consumers are choosing prepaid over checking accounts, given economic conditions and negative feelings toward banks. A recent Mercator survey of prepaid card purchasers showed that 15% had bought the card as a way to pay without a checking account or debit card at a bank.

Government use of prepaid is another significant driver of market growth. Social Security dollars loaded grew by 197%, and the dollars loaded onto cards for state unemployment plans grew by 292%.

These numbers will only continue to climb with recent announcements by theTreasury Department to make all federal benefit payments electronic by 2013 and to pilot the marketing and use of prepaid debit cards for tax refunds to unbanked filers.

Prepaid cards clearly are here to stay. So it is even more important that we ensure the cards offer a positive consumer experience.

Some of the criticism of prepaid cards has been over the lack of consumer protections comparable to debit cards tied to traditional checking accounts. In particular, there is concern that general-purpose prepaid cards aren't subject to Regulation E.

Most of the major prepaid providers are largely adhering to Regulation E, but as prepaid becomes a true alternative to checking accounts, good-faith efforts are no longer good enough. While prepaid will become the purview of the Consumer Financial Protection Bureau, the Federal Reserve should act now under current authority to put prepaid on an even footing with similar payment products.

The louder and more frequent criticism of the cards has been focused on fees. While it is important to consider whether the types and levels of fees being assessed are fair, reviewing fee schedules in the absence of data about how consumers use the cards paints a one-dimensional picture of the customer experience.

Prepaid cards, like any financial tool, are not one-size-fits-all instruments. How much consumers pay for them is driven in large part by how they use them. It would be helpful for companies to provide more public information about usage patterns to enable a robust assessment of prepaid. Recent public filings by the prepaid giant NetSpend related to its planned IPO are a good example of the value of such data.

NetSpend's filings show that direct deposit use is the big driver of usage patterns. …