Should overdraft be allowed for prepaid cards?
26 Aug 2016

The use of prepaid cards has grown exponentially in recent years. In fact, prepaid card use grew 50% just between the years 2012 and 2014, and now 23% of the U.S. population holds some form of a prepaid card (including general use prepaid as well as “closed loop” gift cards). Since payroll cards are a type of prepaid product, employers should pay attention – payroll deposited on prepaid cards is also a growth area. For employers, it electronifies the last mile of payment, including for staff who might not have bank accounts, and makes it easy to pay employees who work remotely. Cards protect funds; if a card is lost, it can be canceled, replaced and the funds restored.

But why are people increasingly using prepaid cards, and are they as safe as bank accounts? Well, in some cases people may feel that they are safer, since prepaid typically does not allow you to overspend, incurring expensive overdraft charges that come with many bank accounts. Pew recently did some research showing that most prepaid card users do not want the option to overdraw their accounts – they use prepaid to control their spending. Nonetheless, overdraft can generate income for prepaid programs and the financial service companies that provide prepaid cards, and some industry players would like to see overdraft features added to prepaid cards.

We think this would be a bad idea, and we are joined by some experts who call on the CFPB to take a firm stance in their upcoming final prepaid rules to disallow overdraft features. Read more in this American Banker article.