Prepaid cards under new scrutiny after RushCard outage
CHRIS PIZZELLO/INVISION/AP/FILE 2015
RushCard, a prepaid card backed by hip-hop entrepreneur Russell Simmons (above), is one of the few celebrity sponsored cards.
When banks wouldn’t let her open a checking account, Andrea Baptista, 27, of Dorchester turned to the RushCard, a prepaid card that promised to help rebuild her credit while letting her pay bills, get direct deposits from her employer, and make ATM withdrawals.
But for nearly a month, Baptista has been blocked from her money, one of thousands of RushCard customers who were affected when an Oct. 11 technology glitch locked out users. UniRush LLC, the company behind RushCards and owned by hip-hop entrepreneur Russell Simmons, said the vast majority of the customer problems have been fixed after two weeks. The company said it is trying to address the remaining issues.
For Baptista, a legal assistant and single mother, the outage prevented her from getting a replacement card and froze her account. It meant having to borrow money from her father to buy her daughter’s Halloween costume and delay paying bills.
“You have to explain to everybody in your life what’s going on,” Baptista said last week. “And it’s embarrassing to have to share with somebody why you don’t have a bank account.”
Consumer advocates and analysts said the RushCard fiasco is an extreme example of the problems that can come up in the prepaid card market, but it also puts a spotlight on an industry that is rapidly growing — with 25 million to 30 million cards in circulation — yet lacks the tight regulations found in the rest of financial services.
The RushCard episode will probably spur regulators, including the federal Consumer Financial Protection Bureau, which is investigating the case, to make changes in the prepaid card industry. It should also alert consumers to the benefits and costs of these cards, from having limited access to cash when something goes wrong, to the high fees and the strict arbitration clauses that make it hard for consumers to file civil suits if they have problems, said Mark Hamrick, a senior economic analyst for Bankrate.com, a website focused on consumer financial services.
“This was something akin to a modern run on the bank,” Hamrick said. “It was as if you were to show up at the doorstep of a bank and the doors were chained shut. The effect is the same . . . More regulations will come down the pike.”
Usage of prepaid cards has grown by 50 percent from 2012 to 2014, with one in 11 adults tapping into these cards monthly, according to the Pew Charitable Trusts, a Philadelphia-based nonprofit.
Prepaid cards initially appealed to lower-income consumers and those without bank accounts as a way to avoid using cash. Now, consumers with bank accounts are increasingly turning to cards such as Bluebird, Green Dot, and NetSpend as a way to curb spending and avoid excessive debt, according to the Pew study.
And companies, from retail giant Walmart Stores Inc. to tax preparer H&R Block and the New York bank JP Morgan Chase & Co., have all gotten into the prepaid card business.
Prepaid cards can be a good way for users to control spending, consumer advocates say. But users should pay close attention to fees, which aren’t always clear and can vary among cards.
For example, some cards have monthly fees of about $10, some charge for ATM withdrawals and for calls to the customer service line, while others have fees to reload money onto the cards.
Hamrick also warns that prepaid cards with celebrity endorsements can be more expensive because the audience attracted to those cards can be smaller and the companies usually need to make up for the limited volume by charging higher fees. In recent years, several cards backed by celebrities, from Kim Kardashian to financial-advice personality Suze Orman, have been discontinued after criticism over fees.
The RushCard is one of the few remaining celebrity-sponsored cards, with Simmons appearing in the card’s commercial and on social media as UncleRush. But Simmons has adapted to the changing industry and lowered some fees since launching his card in 2003. RushCard users now pay up to $10 a month, although the company has waived those charges through Feb. 29 to calm angry customers after the outage. It has also promised to set up a fund to help those who lost money or were charged late fees because of the glitch.
‘This was something akin to a modern run on the bank.’Mark Hamrick, Bankrate.com analyst, about RushCard’s outage
RushCard’s problems, which occurred when the company switched payment processors over the Columbus Day weekend, were amplified because most of its customers didn’t have any other source of money, said Ben Jackson of Mercator Advisory Group, a Maynard financial services consulting firm.
Banks also have technology outages that deactivate cards, but in an emergency, customers can walk into a branch to take out money or get a replacement card, and many have another credit card or account they can rely on, Jackson said.
“In a world where the card is the primary access point, if something disrupts that card it becomes a bigger problem,” he said.
Consumer advocates recommend having an emergency fund available outside of just one card.
When problems do occur, prepaid card customers are also less likely to have opportunities to take the financial company to court because under their card agreements they usually have to waive their right for a jury trial or to file a class action suit and instead settle individually through arbitration.
According to a study by the CFPB earlier this year, about 82 percent of the prepaid cards in the market have arbitration clauses, compared with 53 percent of credit cards.
Consumer groups have urged financial regulators to more closely supervise the prepaid card industry and tighten protections, including prohibiting forced arbitration clauses.
“We need closer scrutiny,” said Lauren Saunders, the associate director of the Boston-based National Consumer Law Center.
But Jackson, of Mercator, said he worries that regulators will develop rules based on the unusual circumstances that led to the RushCard problems.
“I am worried that it’s going to lead regulators to come down on prepaid for something that has nothing to do with prepaid,” Jackson said. “The industry is definitely looking at this.”
So is Baptista, whose credit had been damaged by student loans and other debt. She finally got her money from the company Thursday, although she is still waiting for a new card so that she can review her online statement.
The experience has soured her on RushCard and prepaid cards.
“I don’t trust prepaid cards any more,” she said. “I just need to rebuild my credit and find a bank that will allow [me] to open up a checking account.”
Millions in circulation
There are 25 million to 30 million prepaid reloadable cards in circulation with an estimated $100 billion deposited on them each year.
SOURCE: Mercator Advisory Group
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