The Coming Wave of Non-Credit Cards

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Photo-Illustration by Alexander Ho for TIME; Getty Images (2)

We predicted that more major financial institutions would launch prepaid debit cards in response to the combination of increased regulation and a ballooning number of people who can’t get a credit or debit card. American Express is the first marquee credit card name out of the gate with the debut of its reloadable prepaid card.

This one is a little different from many other prepaid offerings currently on the market in that it doesn’t really seem set up to be a substitute for a bank account; for instance, you can only have a maximum of $2,500 on the card, and loading cash onto it is a cumbersome process. AmEx tells The New York Times it plans to let customers load the card via direct deposit in the future, but for now, the easiest way to load funds onto the card is online, via an existing checking account.

AmEx is touting its relative lack of fees as a selling point, aware that consumers — and lawmakers — are starting to get wise to the death-by-paper-cuts parade of $1 or $2 fees many prepaid debit cards carry. Five of the industry’s largest prepaid companies — First Data Corp, Green Dot Corp., Account Now Inc., NetSpend Corp., and Unirush Financial Services LLC — have until next Monday to provide information to Florida‘s Attorney General, according to Reuters. The state is investigating the companies for deceptive and unfair business practices centering around inadequate or nondisclosure of fees. Two of the companies are also being investigated for claims that their products can help people raise their credit scores (they can’t).
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Clearly, excessive fees are a problem when it comes to prepaid debit cards, but there’s an even bigger reason for consumers to be wary of this and the many other bank-backed prepaid cards we predict will hit the market in the coming months: The laws that protect you if your credit or debit card is used fraudulently don’t extend to prepaid cards. While an individual issuer can offer customers zero liability, that’s wholly at their discretion and can be rescinded at any time.

In addition, the FDIC insurance that protects your money in the event of a bank failure isn’t guaranteed with prepaid debit cards. If the institution that issued your prepaid debit card declares bankruptcy, whether or not you have a prayer of ever seeing that money again depends on how the company organized its customers’ funds. If the money is pooled into an aggregate account, a common occurrence, consumers could lose the right to reimbursement. A 2010 Consumers Union report warns, “Some of the fine print by card issuers tells consumers that the money is not insured,” but it’s not always easy for cardholders to make this determination.

What’s more, unlike credit or debit cards connected to a deposit account, the prepaid ones won’t help you establish or strengthen your credit history, which could hurt your chances to get a loan or open a bank account in the future. This is the other major beef I have with prepaid debit cards. They relegate users to second-class status and don’t give them any kind of on-ramp to the financial mainstream.