Report: Unregulated prepaid cards a loaded proposition

Prepaid debit cards, offered at many checkout counters and a number of Southern Nevada banks, are becoming more affordable as increased competition leads to fewer fees, a recent report states.

The Pew Charitable Trusts report, “Consumers Continue to Load Up on Prepaid Cards,” found that although prepaid cards offer many benefits, they still lag far behind other banking products in consumer protections.

U.S. consumers loaded more than $64 billion onto general purpose reloadable prepaid cards in 2012, more than double the amount loaded in 2009, Pew said.

The report examined changes to the industry since the Washington, D.C.-based nonprofit research group released its first study on the prepaid cards two years ago. To compile the study, Pew examined disclosures and fee structures of 66 prepaid cards issued by nonbanks and traditional financial institutions.

The reloadable cards work like debit cards, but aren’t linked to traditional checking accounts. They work by loading money onto the card. Generally, you can’t spend more than the amount without adding more money, thus avoiding overdraft fees.

Prepaid cards are designed to be used wherever traditional debit cards are accepted: at the cash register, to withdraw cash at ATMs or to pay for online purchases. The Pew study found many consumers use them while traveling instead of carrying cash or as a budgeting tool to limit their children’s spending.

The cards, Pew found, have become in some instances more affordable than basic checking accounts. In its initial study in 2012, Pew found the cards were mostly offered by financial companies like Green Dot Corp or NetSpend Corp.

Pew described those companies as “nonbanks” to distinguish them from traditional financial institutions. Those cards still dominate the market, but at least 10 major banks also offer prepaid cards, including JPMorgan Chase &Co. and Wells Fargo &Co.

As the cards’ popularity has increased, issuers have been criticized for the fees some of them charge consumers. Costs can vary, but can include activation fees and monthly fees, plus ATM, transaction, reload, balance inquiry and statement fees.

The prepaid card remains largely unregulated, Pew said. That gives consumers few protections from faulty disclosures and leaves it up to issuers to cover losses from fraudulent transactions, the report said.

“More consumers are turning to prepaid cards as a convenient tool to control spending and fees,” said Susan Weinstock, who directs Pew’s safe checking research. “While prepaid cards offer many benefits to consumers, they are relatively new products with little oversight.”

Weinstock said a lack of consumer protections undermines prepaid cards as a “safe and easy way to manage money.”

One major problem, Pew found, is that prepaid cards aren’t covered by the federal laws that protect holders of traditional checking account-linked debit cards from money loss and liability for unauthorized transactions.

Most prepaid card issuers offer some protections, but coverage is voluntary. Pew found that prepaid card disclosures involving fees and terms often are incomplete, hard to understand and hard to find.

The Pew report laid out several policy recommendations for making prepaid cards better for consumers, including mandatory protections against liability for unauthorized transactions and requiring that funds be federally insured in the event of a bank failure.

The report also supported prepaid cards “not” having overdraft protection or other automated or linked credit features, and predispute binding arbitration clauses in cardholder agreements, which prevent cardholders from having the choice to challenge unfair and deceptive practices or other legal violations in court.

The federal Consumer Financial Protection Bureau is to release proposed rules for regulating the prepaid debit card industry by June 1.

Bank Executives Sell Shares

It’s a new year, which lets bank executives shed some shares from their portfolios if they so choose. Both Dallas Haun and Robert Sarver have sold shares, Securities and Exchange Commission filings show.

Haun, executive vice president of Zions Bancorp, and president of its Las Vegas-based subsidiary, Nevada State Bank, sold 5,000 shares on the open market in a transaction occurring Feb. 3.

The stock was sold at an average price of $28.06, for a total value of $140,300. Following the sale, Haun now directly owns 28,168 shares in the Salt Lake City-based bank holding company, valued at approximately $790,394.08.

Sarver, CEO of Western Alliance Bancorp, sold 100,000 shares of company stock in a transaction dated Jan. 27. According U.S. Securities and Exchange Commission filing, Sarver’s shares sold at an average price of $23.79.

The transaction was valued at $2.37 million. Following the sale, Sarver now directly owns 1,909,469 shares of the Phoenix-based company, valued at approximately $45.42 million.

Western Alliance owns Las Vegas-based Bank of Nevada. Both transactions were disclosed in an SEC Form 4 filing.