I have no views on the musical abilities of Canadian-born pop star Justin Bieber. But I do have strong views about the new prepaid debit card he has recently endorsed, called the SpendSmart Prepaid Mastercard. Although Justin Bieber says this prepaid card will help teenagers learn how to manage their personal finances, it will ultimately teach teenagers only one fundamental truth: Prepaid debit cards are not a good product. Teenagers and anyone else — including college students — are better off getting a savings and checking account with a local credit union than buying a prepaid debit card.
In the abstract, prepaid debit cards sound like a great idea. A person doesn’t have to worry about opening up a savings or checking account with a bank or another analogous financial institution to use plastic. But the abstract benefits of prepaid debit cards don’t coincide with the basic reality of the harms they inflict on average American consumers. As Mitchell Weiss, co-founder of the University of Hartford’s Center for Personal Financial Responsibility, said to U.S. News, “These cards prey on the under- and unbanked, who mistakenly believe they’re more economical than having a traditional checking account.”
Weiss is entirely correct. These prepaid debit cards don’t help consumers. This is evident from the multitude of fees these cards charge their users. For example, let’s look at the SpendSmart prepaid debit card that Justin Bieber is so enthusiastic about. It charges a monthly fee of $3.95, a $1.50 fee each time a card user withdraws funds from an ATM, a $0.50 fee each time a card user checks his or her card balance using an ATM and a $3 fee each time a card user does not use his or her card for a 30-day period.
The SpendSmart card is not the only prepaid debit card to charge exorbitant and excessive fees. Of 15 prepaid debit cards that Consumer Reports examined, five charged card users for not using their debit cards during a certain time period, 13 charged card users monthly fees and 14 charged card users for withdrawing funds from an ATM. Thus, it seems obvious from the empirical evidence that these prepaid debit cards do not serve the interests of consumers. Instead, they mainly serve the interests of wealthy corporations. As Michelle Jun, a lawyer with Consumers Union, said to The New York Times, “We would not recommend that parents use prepaid cards for their teens. It doesn’t help your teen establish a credit history or a relationship with a financial institution, so we recommend going the traditional route and opening up a checking account at your bank or credit union of choice.”
Recently, some of the biggest American financial conglomerates – including JP Morgan – have gotten into the prepaid debit card business, an activity these institutions avoided in the past. Why are these institutions suddenly so interested in the prepaid debit card business? The biggest reasons are the 2010 Dodd-Frank Act and regulations subsequently enacted pursuant to Dodd-Frank and the Credit CARD Act of 2009, which include new restrictions on how much financial institutions can earn from debit card fees.
According to Standard & Poor’s, these restrictions under Dodd-Frank and the CARD Act will cost financial institutions approximately $7 billion annually. To make up for this lost revenue, financial institutions are entering the highly lucrative prepaid debit card market. According to Mercator, a consulting firm, the $57 billion prepaid debit card industry is expected to grow approximately 42 percent annually between 2010 and 2014. Teenagers and other consumers should not purchase these prepaid debit cards. Instead, they should join their local credit union. Members of a credit union are also the owners. Credit unions offer their members low-interest loans, overdraft protection and no-fee debit cards. Most importantly, credit unions serve the interests of consumers, prepaid debit cards do not.
Justin Bieber has endorsed the SpendSmart prepaid debit card for teenage consumers. This particular card, like most prepaid debit cards, has excessive fees that negatively impact average consumers. If potential debit card owners want to do the smart thing, they should join their local credit union instead of purchasing the SpendSmart prepaid debit card.
Aaron Loudenslager ([email protected]) is a first year law student.
