Prepaid options critical, but costly, for unbanked consumers

by Center for Personal Finance editors

NEW YORK (3/21/06)--A study released last week revealed that 10.2 million adults--about 5% of the U.S. population--live in a household that doesn't use any financial institution. Some consumer advocates worry that these unbanked consumers, many of whom rely in part on stored value or prepaid cards, are paying high fees with little consumer protection (Scarborough Research March 16).

Jean Ann Fox, director of consumer protection for Consumer Federation of America, warned attendees of the 52nd annual American Council on Consumer Interest conference in Baltimore last week that consumers have no protection with stored value cards; they're laden with a variety of costly fees and don't have adequate notices if the cardholder needs to complain or loses the card. Other problems include losing the dollar value of unspent balances, unauthorized use, and confusion over whom to call with questions because the recipient often is not the purchaser.

While prepaid options are critical to the unbanked consumer, the study also found that only one of 10 uses check-cashing services. More consumers use credit cards than check-cashing services, according to the study.

A related article in American Banker (March 17) noted that 54% of unbanked consumers are women, 59% are 44 years old or younger, and 70% have an annual household income of less than $35,000.

Know how stored-value or prepaid cards work and what fees you may incur. For example, ask if there's a monthly or annual maintenance fee, reloading fee, or inactivity fee. Keep the cards safe, because regulators haven't decided whether stored-value cards will be protected by Regulation E, which covers debit cards linked to traditional checking accounts.