Pew: Consumers Without Banks Use Prepaid Cards Like Checking Accounts

WASHINGTON—The Pew Charitable Trusts released a report today that finds the use of general purpose reloadable (GPR) prepaid cards on the rise among consumers. In particular, prepaid cardholders who are known as “unbanked,” because they don’t have traditional bank accounts, use their cards like checking accounts. This fact is a key reason the Consumer Financial Protection Bureau should bring more safety and transparency to this market by adopting its pending proposal on prepaid cards.

GPR prepaid cards, also called GPR prepaid accounts, allow consumers to load funds via direct deposit or with cash and can then be used to withdraw funds from ATMs or to make purchases at retail outlets. Today, about 23 million adults use prepaid cards regularly.

The report, called “Banking on Prepaid” and based on a nationally representative telephone survey of adults who use GPR prepaid cards at least once a month, examined consumers’ knowledge, attitudes, and perceptions based on whether they have a checking account.

“Our data show that the unbanked use their prepaid cards like checking accounts, reloading them more frequently and registering them more often. In contrast, people with bank accounts use the cards more like an ancillary financial product in that they load funds on a card, spend it down, and then buy another one,” said Susan Weinstock, director of Pew’s consumer banking project. “When a prepaid card is someone’s only transaction account, it is especially important to ensure that the card is safe and comes with uniform protections against theft, loss, and deception.”

The report’s key findings include:

• Prepaid card use is becoming more common. Use jumped more than 50 percent between 2012 and 2014, driven primarily by increased adoption among consumers with bank accounts, many of whom purchased their prepaid cards at a bank or credit union. These individuals tend to have higher incomes and are more demographically similar to the general U.S. population than unbanked prepaid card users.
• Unbanked prepaid cardholders use their cards more like traditional checking accounts. The unbanked check their balances more regularly, reload more frequently, and register their cards more often than banked cardholders do.
• Unbanked prepaid card users tend to have lower incomes than banked users. More than 8 out of 10 unbanked prepaid cardholders have annual household incomes below $50,000—with about one-third under $15,000 per year.
• Prepaid cards are often used as a budgeting tool. Consumers—especially the unbanked—use the cards to help control spending, stay out of debt, and avoid overdraft fees.
• Most prepaid card users do not want the option to overdraw their accounts. Many cardholders use their cards to control their spending in part by not having the ability to exceed their balances. They do, on the other hand, want features such as saving and budgeting tools built into their accounts.
• Most prepaid card users do not know whether their funds are FDIC-insured or whether their cards have an arbitration clause. Almost all cards carry FDIC insurance, and Pew previously found that about three-quarters (77 percent) of the cards studied included a binding arbitration clause. The availability of these features depends on the policy of the prepaid card manager, and consumers must read and understand their account agreement to determine their status.
• Many prepaid cardholders who are covered by liability protections do not know it. Such safeguards minimize or eliminate a cardholder’s liability for unauthorized use if a card is lost or stolen—but only if the card is registered and the problem is reported in a timely manner. Unbanked prepaid cardholders tend to be less knowledgeable about this protection than those who also have bank accounts.

Currently, GPR prepaid cards are not required to have the same level of protection as traditional bank accounts, such as FDIC insurance, liability coverage for unauthorized transactions, and restrictions on overdrafts. The CFPB released proposed rules in December 2014 that would enhance consumer protections for prepaid accounts. Pew’s report urges the CFPB to finalize these rules quickly.

Pew commissioned the Media, Pennsylvania-based firm Social Sciences Research Solutions to field the survey from Oct. 15 to Dec. 10, 2014. A total of 8,641 respondents were screened in order to reach 587 respondents who use a prepaid card at least once a month.

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The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Learn more at www.pewtrusts.org.