Prepaid debit cards: With all the scams, are they worth it?
By Susan Ladika
A lot of work is being done to make sure prepaid cards are not being used nefariously
Mercator Advisory Group
The scammers often target recent immigrants, threatening to deport or arrest them, revoke their driver's licenses or have their utilities shut off, according to the IRS.
Other common scams involving fraudsters include:
One tax-time threat involves fraudsters filing fake tax returns in someone else's name, and requesting the refund be loaded on a prepaid debit card. Between 2011 and November 2013, the IRS stopped more than 14 million suspicious returns and more than $50 billion in fraudulent refunds, yet countless others have slipped through the cracks. Those who file fraudulent tax returns will use the victim's Social Security number and other personal information, and then ask for the refunds via prepaid debit cards.
In other instances, thieves tamper with prepaid debit card packaging and steal card information. When a consumer loads funds on the card, the crooks spend the money before the legitimate customer can.
Law enforcement, government officials and card issuers are working to ramp up their defenses. "A lot of work is being done to make sure prepaid cards are not being used nefariously," Jackson says.
In one case, a card issuer stopped sending prepaid cards after hundreds of requests poured in from a 10-unit apartment building, Jackson says. In some cases, the IRS is holding some tax refunds longer to make sure they're going to the right people.
Some issuers are submitting prepaid debit card applicant information to a database to see if individuals are trying to obtain a multitude of cards, says Terry Maher, corporate counsel to the Network Branded Prepaid Card Association.
We have to walk a fine line between making it more difficult to obtain a card and losing the unbanked.
|-- Terry Maher
Network Branded Prepaid Card Association
Issuers are also working to prevent identity theft by asking more questions when someone requests a card, such as what address they lived at as a child, Maher says. The answer can be compared with information supplied by data brokers.
Card user behavior is being monitored, too. For instance, if money is loaded from multiple locations and quickly withdrawn, that's a red flag.
The fact that most cards are purchased at retailers, check cashing locations and online, rather than at banks, complicates policing efforts. At the retail level, issuers are using more secure packaging so thieves can't steal the information from cards sold in stores. But because the cards make it easier for the unbanked to purchase goods and services, "we have to walk a fine line between making it more difficult to obtain a card and losing the unbanked," Maher says.
Susan Grant, director of consumer protection at the Consumer Federation of America, says that prepaid cards are more than an alternative for people who don't qualify for mainstream banking. Prepaid debit can also be a budgeting tool for those who don't want to carry cash, but want to avoid the overspending that can occur with other payments.
"They are not like checking accounts that you can overdraw or credit cards where you'll be socked for interest if you can't pay your bill off in full," Grant says.
And an increasing number of employers and government agencies are using them to pay employees or benefit recipients.
Maher says Milennials in particular use them to make online purchases. His three adult children have gone that route after all three had their checking accounts drained after using their bank debit cards to shop online.
Legal protection in flux
Prepaid debit cards lack the consumer protections that apply to bank account-linked debit cards. For lost or stolen bank debit cards, federal law limits your liability to $50 if you report the loss within two days. Prepaid debit cards, except for those issued by the government or payroll employers, don't have that protection under law, although some issuers may provide loss protection in their contracts. The U.S. Consumer Financial Protection Bureau is considering rules that would extend protections to prepaid debit, including limits on fraud liability and the right to dispute unauthorized charges.
While anyone can become a fraud victim, many of the scams target senior citizens or those with low incomes, Jackson says. "They might be less financially sophisticated and might be easier to take advantage of."
And those on fixed incomes or with lower incomes "tend to get hurt a little more" because they lack a financial cushion if they fall prey to a scam, he says. "It's a lot tougher for those people to recover."See related: Don't be fooled into falling for these 8 scams, Gift card scammers skirt security with new tricks