Prepaid cards like Wal-Mart's Bluebird card have helped millions of Americans forgo banks and credit cards - but there's a catch.
Prepaid card use grew nine times faster than credit card use over the same period.
Since then, the money spent using prepaid cards has nearly doubled, as big players like Wal-Mart Stores Inc. (NYSE: WMT) and American Express Co. (NYSE: AXP) have entered the game with the prepaid Bluebird card.
But the introduction of these corporations into the growing prepaid card market could be dangerous to the people who rely on prepaid cards to spend money, and they don't even realize it...
In 2015, 27% of Americans either didn't have bank accounts or supplemented their banking with other financial services, according to The Wall Street Journal reporting FDIC data on Sept. 17, 2016.
In other words, over a quarter of Americans either don't want to deal with banks regularly, or can't.
That's where prepaid cards come in.
According to a 2013 report by the Federal Reserve Bank of Boston, 45% of Americans without checking accounts use prepaid cards. For these 11 million Americans, these cards are a lifeline with which they can deposit their paychecks, withdraw money from an ATM, and shop online without using a bank.
Furthermore, prepaid card use among Americans with household incomes under $25,000 has reached 49%. In other words, nearly half of low-income Americans rely on these cards to keep their money safe.
But here's the problem: Because the issuers of these cards - like Wal-Mart - aren't typically banks, the cards may not be FDIC-insured.
That means if the companies supporting these cards were to go under, cardholders could lose all the funds on their cards, as well as their primary means of receiving, spending, and saving money.
Wal-Mart's Bluebird card wasn't even FDIC-insured until March 2013 - six months after it was first released. Had Wal-Mart or American Express gone under in that time, Bluebird cardholders could have lost everything.
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The danger doesn't stop at insurance. Wal-Mart and other prepaid card issuers have enjoyed all sorts of freedom from regulation, even though millions of Americans rely heavily on them for their financial needs.
Money Morning Capital Wave Strategist Shah Gilani pointed out these problems over four years ago.
"People who buy prepaid cards don't get any interest on what are essentially 'deposits,'" he explained in December 2012. "Meantime, the 'sponsors' of these cards are collecting your money and banking it in FDIC-insured banks before you spend it. Or maybe they're investing it to make an interest rate spread somewhere, or speculating with it to make huge profits for themselves. There's nothing stopping them, really."
In other words, companies are playing with $300 billion of consumers' money to make a profit - and the cardholders aren't seeing a cent of it.
Add to that the lack of regulation for disclosing fees, resolving disputes, and handling the loss or theft of a card. And now remember that this is a $300 billion industry that millions of low-income Americans rely on as the only means of accessing their money.
Yeah - it's pretty bad.
But as long as this powder keg doesn't explode before April 1, 2018, prepaid cardholders could be OK. Here's why...
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In October 2016, the Consumer Financial Protection Bureau (CFPB) finalized a set of protections for prepaid account users. The new federal rule will go into effect in April 2018.
Here's what the rule does for consumers:
These rules focus on keeping consumers informed and guarding against unreasonable fees and charges, which will make handling money fairer and safer for low-income Americans. As Shah said back in 2012, "regulation isn't always a dirty word."
Having reviewed the new rules, Shah says, "These new rules are fundamental to transparency and common decency in the transaction intermediation industry... You have to wonder how it was that basic transparency wasn't required before."
Indeed, the regulations on fees could help millions of people.
"About 23 million people use prepaids in the U.S. (according to a Pew Charitable Trusts report). That's a lot of fees," Shah notes. "Not adding unreasonable collection fees and late charges makes sense."
But be careful, as these changes won't go into effect until April 2018. That means that your liability could still be unlimited if your prepaid card is lost or stolen.
The risk to consumers isn't lost on Shah: "How blatantly unfair is that in our world where theft and fraud is an almost everyday occurrence."
Clearly, the regulations can't come fast enough. But they do fall short in one major area: what the card issuers do with consumer money.
You see, the possibility of companies like Wal-Mart speculating with the money on your Bluebird card is still very real.
"Unfortunately, the new rules don't address any of this," Shah says.
Companies can still be "gambling, I mean trading, using deposits as cheap capital," according to Shah, and although the depositors would theoretically be protected if the card issuer is covered by the FDIC, "we really don't know for sure."
Despite all the regulation, the safety of money put into prepaid cards is still in question, especially if the company issuing the cards isn't covered by the FDIC. In other words, the new regulations still leave a lot unknown.
"Could depositors be at risk if the institution separates those monies in an off balance sheet holding company, for instance? I don't know, we don't know," Shah claims.
"If the holding company isn't a covered institution, that's a real worry. If it goes under, there's no recourse. NONE. The law doesn't provide for it. If any prepaid card isn't covered by a bank, no one should use them, ever."
Shah is committed to helping you protect your money in a world run by crony capitalists and ineffectual politicians. Find more ways to hang on to and even grow your hard-earned money, right here...
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