New scams involving prepaid debit cards are making headlines:
Fake loan modification schemes. Fraudsters posing as Internal
Revenue Service officials demanding immediate tax payments. Hacking
scams involving phony legal fines.
So how safe are prepaid debit cards, and are they even worth
keeping in your wallet?
"With any new technology or payment process, as growth explodes,
people take advantage of that growth," says Doug Johnson, vice
president of risk management policy with the American Bankers
Prepaid cards have become particularly popular among the 68
million Americans who, according to the FDIC, lack full access to
banking services. Because you generally don't need to undergo a
credit check to get a prepaid card, they're useful if you have no
credit score or a spotty credit record. Users can buy general
purpose prepaid cards at a host of merchants and use them at
stores, ATMs or online, for monthly fees of about $5.
"For people who don't have a bank account or access to regular
credit, that's their way of accessing electronic money. It helps
bridge the digital divide," says Ben Jackson, senior analyst of
prepaid advisory service with Mercator Advisory Group.
But fraudsters are drawn to the cards because they provide easy
access to cash outside the scrutiny of the banking system.
Criminals posing as legitimate creditors may ask you to purchase a
prepaid card, or a reload card for replenishing your prepaid
account, and give them the details about the card and PIN. With
those details, they can withdraw the cash on the card.
For example, you might get a call from someone claiming to be
from your utility company, threatening to turn off your power
unless you send immediate payment via a GreenDot MoneyPak. The call
is not from your utility company, and the fraudster makes off with
Prepaid fraud surges
A study last year by Mercator found prepaid debit card usage and
fraud skyrocketed between 2009 and 2011. Prepaid card usage jumped
120 percent, to total $83.6 billion in transactions. At the same
time, fraud soared 183 percent, to reach $51 million.
Those numbers primarily include Visa and MasterCard branded
cards. They don't include cards issued by American Express or
Discover, gift cards, or government electronic benefit transfer
As prepaid debit card usage jumped, the use of traditional debit
cards also rose 31 percent, to $1.82 trillion, while fraud rose
just 3 percent, to $1.33 billion.
Prepaid card issuers continue to put new safeguards in place to
protect users, but "it's like a game of Whac-a-Mole," Jackson says.
As one type of fraud comes under scrutiny from card issuers and law
enforcement, a new one pops up.
One recent fraud involves scammers
claiming to be IRS representatives
. They call individuals, demanding immediate payment of taxes with
a prepaid debit card or wire transfer. So far thousands of victims
have lost more than $1 million in the scam.
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:
- Hackers hijacking personal computers with a screen warning
that federal law violations have occurred. The fraudsters demand
victims use prepaid cards to pay a fine to get their computers
- A fake firm offers homeowners a loan modification. Victims
are told to stop making mortgage payments, and instead send money
on prepaid cards to the fraudsters to cover processing fees and
closing costs. Victims fall behind on their mortgages and the
fraudsters are never heard from again.
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
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
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.
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
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
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
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