This article, and too many more just like it, assumes everyone inthe United States has an income sufficient enough to cover food,rent, heat and medical expenses, and can therefore maintain abalanced budget that assures a checking account will never gonegative and avoid an overdraft fee. I wish I lived in that world,but I live in this world where I get charged an overdraft fee aboutonce a year despite being able to cover all my necessities and manyluxuries.
For those not living in the utopian version of the U.S. discussedby the experts at US News & World Report, prepaid productsdeliver a very real value proposition. Most prepaid products chargefees that are directly related to the costs associated withoperating the prepaid program. This makes the fee structurepredictable. For anyone that has paid a $30 NSF fee associated witha checking account going negative, prepaid is a breath of fresh air- they don’t charge negative balance fees.
The article makes fun of the fact that many prepaid programs chargea dormancy fee:
Credit card expert and consumer advocateBeverly Harzog takes issue with the SpendSmart card’s $3 inactivityfee if the card sits unused for 90 days. “That’s so silly [tocharge a fee] because you decided not to spend your own money,” shesays.
Had US News & World Report talked to an actual expert, thelogic of this fee could have been easily explained. Prepaidprocessors charge program managers for every card that is “active.”The processor must assign resources to every active card to assurethat the card can be accepted at the point of sale within a networkspecified timeframe – typically 300 milliseconds or less. Not toosurprising, it costs money to respond to one card out of millionsin just three tenths of a second. Since the card operator must paythis cost even when the card is not used, they often charge amaintenance fee if the card has been dormant for a few months. Themaintenance fee imposed by the card supplier is used, in part, topay for the processor that supports the card.
But Beverly Harzog then makes a broad statement that is almosttotally wrong:
And unlike traditional checking or savingsaccounts, prepaid cards are not insured by the Federal DepositInsurance Corporation. “If the institution that issues that cardgoes under, the consumers lose all that money on that card,” saysHarzog. “So many people that use these cards are living month tomonth anyway.”
The vast majority of prepaid cards that support the unbanked andunderserved are covered by FDIC insurance. While the AmericanExpress card, and a very few others, are not – the vast majorityare. It is sad that financial experts are willing to talk on therecord about financial products they know so little about.