June 21, 2011 in Business

Pre-paid debit card users face higher fees

Associated Press
 

WASHINGTON – Millions of Americans who use prepaid debit cards could soon face higher fees.

Under a rule to take effect in July, companies that issue debit cards must reduce the fees they charge retailers. To recoup their lost revenue, banks that offer the cards are raising fees for people who use them.

People who use prepaid debit cards, typically low-income consumers and those collecting government benefits, are supposed to be shielded from the fee hikes. To protect them, the rule provided an exemption: It let companies that issue prepaid cards keep charging retailers higher rates.

But that exemption could take up to a year to enact. In the meantime, card companies will likely charge users of prepaid cards higher fees to recoup the lost revenue.

About 70 percent of prepaid card users earn less than $45,000, according to data from Aite Group, a research firm. The cards, preloaded with cash, give users easy access to their money. Others use them to receive government benefits.

Annual fees for the cards can run from $108 to $320, according to data analyzed by the consulting firm Bretton Woods Inc. To make up the swipe-fee revenue they’d lose while the exemption is phased in, card issuers would need to raise fees by up to $220.

If prepaid-card companies can’t collect high swipe-fees, “lower-income people are going to get clobbered,” said Todd Zywicki, a George Mason University law professor.

No one knows exactly what the new rule from the Federal Reserve will require once it’s released. It could take months for computers to recognize new categories of cards, said Brian Riley, a research director with Tower Group, a consulting firm.

Banks and other companies that issue prepaid cards will have to change how they handle debit transactions. So will Visa and MasterCard. The same for payment processors, networks that process PIN transactions and government agencies.

“It’s not like flipping a switch; there’s definitely lots of coding involved,” said Madeline Aufseeser, who spent decades in the prepaid industry and is now at the Aite Group.

Some companies might be able to make the changes in a week, she said. Others could need months.

For many people without bank accounts, the cards have become essential. Prepaid cards enable people to buy online or via electronic kiosks – an alternative to costly check-cashing storefronts. There’s no need to visit bank branches or reveal many personal details. The cards also help budget: Users can’t spend more than they’ve loaded on a card.

More than 10 million households use general-use prepaid cards, often to help avoid bank accounts.

© Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email