We’ve reported on this a number of times before, and it is time to say it again:  Non-gift prepaid debit cards are not covered by the fee limitations imposed on gift cards by the Credit Card Act of 2009, and issuers are free to load up as many fees as they wish, and many do.

As the Wall Street Journal reports (Drawing Benefits Via a Debit Card?  There’s a Fee for That, 5/14/11) banks seem to be prepared to use prepaid debit card fees to make up for lost fee revenue from normal debit card interchange fees.

The combined regulatory changes for credit and debit cards are expected to cost financial firms about $26.2 billion a year in revenue, according to R.K. Hammer, a credit-card consulting firm in Thousand Oaks, Calif.

Richard Davis, U.S. Bancorp’s chairman, president and chief executive, said last month that prepaid debit cards and other products will help the company recover roughly half of the revenue likely to be lost from swipe-fee rules being written by regulators.

Keep in mind that fees on most of these cards are already high:

PNC Financial Services Group Inc. subtracts 50 cents from the unemployment benefits of Indiana residents every time they check their balance at one of the Pittsburgh bank’s automated teller machines. Recipients also get just one free cash withdrawal per week; other cash withdrawals cost $1.25.

Wow! It gets worse.  Prepaid debit cards are allowed to charge you for overdrawing your balance, which is reminiscent of the debit card overdraft gold rush which just got outlawed by federal laws.  Who in the world would expect a prepaid debit card to allow charges beyond the available balance.  Even more so than normal debit cards, consumers expect exactly the opposite, which makes these fees a real blind-side.

Given a choice between prepaid gift cards that have highly regulated (and reasonable) fees, and prepaid debit cards that are already saddled with a myriad of fees and more to come, the prepaid debit card industry would surely find a cold reception from consumers.

But states and the federal government seem to be charging full speed ahead on issuing benefits, tax refunds, and other government to consumer money transfers via prepaid debit cards and they don’t appear to have made much effort to negotiate reasonable fees.  Furthermore, some states officials were involved in lobbying for the prepaid debit card exemption from the new rules on swipe fees:

Last year, 10 state treasurers successfully prodded lawmakers to shield prepaid debit cards from part of the Dodd-Frank financial-overhaul law that limits so-called “swipe fees” charged to retailers.

The bottom line is that these cards are no bargain for consumers.  If you are unfortunate enough to get one, do your best to get all the money off of them immediately before the fees put a substantial dent in the balance.

Prepaid card issues have been pushing non-gift prepaid card since the Federal Reserve finalized gift card rules for the Credit Card Act of 2009 and this recent news blurb (Wall Street Journal Overheard, 3/8/11) perfectly demonstrates the fee traps that exist more than ever in non-gift prepaid cards.  As a reminder, the Credit Card Act of 2009 gift card rules exempt non-gift prepaid cards from the rules on disclosure and fee limits.

Price is everything for Wal-Mart Stores’ customers. So users of its popular prepaid debit card, managed by Green Dot, may be surprised to hear they still run up $3-a-month fees for up to two months even when their balance hits zero.

Many simply never use the card again. But those who do may find these fees and a regular $3 reloading fee deducted. For somebody depositing $100, that adds up to a painful 9% hit.

While monthly maintenance fees are disclosed by Green Dot, the cardholder agreement doesn’t specify that such fees can push account balances into the red. The only place to learn that level of detail is in Green Dot’s SEC filings, notes analyst Thomas McCrohan of Janney Capital Markets. Everybody knows the importance of reading the small print before signing up for a new financial product. But trawling through the 10-Q?

That’s a new low for both puntive fees and lack of disclosure for a prepaid card.

The Wall Street Journal points out in an article today (Banks Pin Revenue Hopes on Prepaid Cards) why prepaid (non-gift) cards are a bad idea for consumers.

Prepaid cards carry the same interchange rates as debit cards, typically 0.75% to 1.25% of each transaction. So if banks lose some of the debit-card fees, they hope to regain them through increased prepaid-card use.

Because these cards are not covered by either the new gift card laws put out by the Federal Reserve, or the new laws regarding debit card fees, banks are free to charge what fees they want and apparently plan to make up lost revenue through these cards, which is sure to be a bad deal for consumers.

One of the biggest problems with open-loop gift and prepaid cards is the ability to use them all up, or, in some cases, use them at all, as gift and prepaid open-loop cards can be very difficult to use online.  So, if course it catches our attention when there is mention of making  these cards easier to cash out.  Take for instance this recent press-release by MasterCard:

MasterCard Inc. is partnering up with Cardtronics Inc. in order to make free ATM access a possibility for prepaid card members across the country.

Quick Overview of Prepaid Cards

MasterCard prepaid cards are similar to gift cards and can be used as gift cards in that you purchase the card and then can contribute additional money to the card. Money can be added in-store at the time of purchase, online or via direct deposit from your paycheck. You can reload the card continually.

This card is basically an alternative to cash, without all the complications of maintaining an account or credit card. MasterCard offers different cards, including prepaid gift cards, travel cards and cards for everyday purchases.

MasterCard Differentiates From Other Prepaid Card Issuers

MasterCard has focused on growing its prepaid market and the latest addition to the strategy is expected to reel in more prepaid companies. Neil Dugan, MasterCard’s VP and head of U.S. markets prepaid product management told US Banker, “It’s a great opportunity for prepaid companies that are looking to differentiate, are looking for ways to provide value for their cardholders, looking to continue progress in the evolution of their products and the way they are going to market.”

MasterCard Partners with Allpoint Network

This decision also involved Cardtronics Inc.’s Allpoint Network, America’s largest surcharge-free ATM network with more than 37,000 ATMs across the nation. Although prepaid cards are a small portion of Allpoint Network’s business, the company is eager to increase that portion. “We’re trying to leverage our infrastructure as a financial kiosk leader to sell more products and services to this growing segment,” Allpoint president Ben Psillas told US Banker. Usually, Allpoint collects revenue from a monthly fee that banks and other customers pay based of of the number of cards that have access to the Allpoint ATMs. Card issuers who use the Allpoint Network through MasterCard will get a special deal on the price they pay. The terms of the deal were not specified.

It is important to make cash as accessible as possible for prepaid card users who are looking to replace actual cash with the cards. Making ATM usage free and accessible is a smart move on MasterCard’s part and could help build its customer base.

Sounds good right?  Well, sort of.  They don’t actually come out and say that you can get cash for your open-loop prepaid or gift card at an ATM, but they seem to vaguely imply this.  Interestingly enough, MasterCards FAQ makes in interesting statement about using prepaid and gift cards at an ATM:

Can I use my Prepaid, Gift, and Credit cards at an ATM?

Yes. You may withdraw cash against the balance on most MasterCard prepaid and gift cards at any ATM. However, not all prepaid and gift card issuers allow ATM or foreign transactions. Be sure to check with your card issuer to ensure these types of transactions are permitted. Most Credit MasterCard® cards also allow you to obtain cash advances at an ATM. You will need a Personal Identification Number (PIN) to withdraw cash. To contact your card issuer, you will find their contact information on the back of your MasterCard card and/or on your billing statement. Or you can visit the issuer’s Web site to manage your account online.

The real truth lies in the fine print, which is that it is up to the individual issuing banks to decide whether or not you can simply cash out your gift card at an ATM.  As far as I know, most issuing banks DO NOT allow this or I suspect will make it hard to obtain a PIN.

Still, the fact that many more ATM’s will be available for these transactions if they are allowed is a step in the right direction.

A recent LA Times consumer advocate column states that a customer was upset when he found out that Target charged him a $4 activation fee.  When I tried to verify this by going through the purchasing process with Target online, I was not charged an activation fee, but only a $1.95 shipping and handling fee, a cost that seems reasonable.

Is Target charging an activation fee for its gift cards purchased in-store?  Why?

I just came across this story on Consumerist.com about the Walmart money card, which, by all appearances is a normal Visa prepaid gift/debit card.

The biggest problem with the card is its onerous activation scheme, which seems almost designed to prevent people from successfully activating the card, thus allowing Walmart to keep the money.

1. You need to call to activate it, unlike other prepaids that are activated when purchased at the store.
2. When you call to activate, you need the 14 digit activation code from the purchase receipt.  I can imagine that most of the time, people giving a gift card do NOT include the receipt.
3. Activation requires that you give them all kinds of personal information, including your social security number.

Collection of personal information to identify the individual purchasing or using a card is something banks are required to do, so I can’t help but wonder if Walmart’s banking partnerships and in-store financial services are responsible for these activation requirements.

While I do like the idea of a post-purchase activation scheme, which could help reduce the rampant mail theft that occurs with gift cards sent through the US Postal Service mail, Walmart seems to have gone about it the wrong way.

Even without the activation requirements, these cards are a poor choice as they seem to be saddled with about every fee known to man.

The American Express gift card is probably a better choice.

I’ve made no attempt to hide my prejudice in favor of American Express gift cards lately as they have shown some extraordinary customer service and were the first to do away with monthly fees, but this agreement with National Gift Card to market a corporate volume rewards card seems like s step in the wrong direction.  It is no secret that gift card issuers, expecially open-loop ones, are scrambling to find other ways to ring up fees now that the new gift card rules are coming in August.  The most common tactic seems to be to offer cards that aren’t classified as gift cards and so are not beholden to the gift card rules under the Credit Card Reform Act of 2009.  This move by Amex appears to be just such a tactic.

While the rewards cards are offered at a discount to face value, and carry no monthly fees, they expire after 12 months and lose ALL of their value.  Seems rather drastic.  I would avoid these cards.

Mail-in rebates are what gift cards wish they were.  Let me explain.

Anyone who has tried to get a mail in rebate knows that the odds are against you.  In fact, only somewhere between 20% and 40% of mail-in rebates are ever redeemed.  Now, given that many people don’t bother with the mail-in rebate, that number is artificially low.  But, as I can attest myself, it is extremely difficult to get your mail in rebate back, for a number of reasons, including the fact that it may just never show up after you’ve mailed it in, or you send the wrong part of the packaging to claim it, or the paperwork is filled out wrong in the smallest of ways … you get the idea.

Well, companies that offer rebated decided that they liked some of the provisions of gift cards so much they started offering rebate cards instead of checks.  Now, in addition to it being really hard to get your rebate, once you get it, there are even more ways that you won’t be able to spend it.  Rebate cards are essentially the same as gift cards except, since the government considers it free money, rebate cards DO NOT fall under the gift cards rules – pretty much any of them.

So, if you do get a rebate card, here are some tips to getting the most out of it.  Probably the best tip is SPEND IT IMMEDIATELY!  Here is an excellent blog called RebateRemedy dedicated to getting the most out of rebates.

The process of adapting to limits on fees has begun, such as the Valley View Mall’s gift cards, which no longer have expiration related fees, but now cost more when you purchase them.

Another interesting fact about this particular mall’s gift cards is that while the previous ones were American Express branded, they could only be used at mall stores.  The new ones can be used anywhere an Amex card can be used.

Holy cow!  This article claims that 33% of Australian gift card go unredeemed.  While that figure is for the number of gift cards sold, apparently it represents the value that goes unredeemed as well.

What is curious though is that the article (entitled Profiting from Expired Gift Cards) is for merchants and touts the benefits of selling gift cards as a way to make more money.

Came across an interesting restriction while reading the terms & conditions for the US Bank Visa gift card:  “Resale of Gift Cards is strictly prohibited.”

Wow, that’s quite a restriction.  But the US Bank gift card is unattractive for their many fees, most of which will presumably change after the gift card rules from the Federal Reserve as per the Credit Card Reform Act of 2009 take effect in August.  Their fees include $.50 for using the automated 800 number, $1.00 for talking to a live representative, a $2.50/mo inactivity fee after 12 months, $15 balance transfer or replacement fee, and a 3% foreign transaction fee.  The worst though is that the terms & conditions include a hefty disclaimer that provides plenty of hoops you must jump through to get your money back if your card is stolen or otherwise used fraudulently.

I’m going to do a comparison to these current terms & conditions after August.