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Why Prepaid Cards Will Always Have Fees

NEW YORK (MainStreet) — Consumers shouldn’t expect the fees associated with prepaid debit cards to go away just because the market has gotten more competitive.

Despite being exempt from the Federal Reserve’s ruling that banks can charge merchants no more than 21 cents for debit card swipe fees, a provisionj contained in the Durbin Amendment to the Dodd-Frank Financial Reform and Consumer Protection Act of 2010, prepaid products don’t offer the issuers many alternative ways to bring in revenue, says Odysseas Papadimitriou, CEO of credit card comparison website CardHub.com.

Purchases made with prepaid cards don’t earn boatloads of interest, like those charged to a credit card, and prepaid card users aren’t subject to overdraft fees, which even with new regulations still net debit card issuers (i.e. banks) a pretty penny.

“Interchange fees won’t cover the cost of these cards,” Papadimitriou says. “[Providers] have the fees because they need to make money. They’re not a nonprofit.”

But that doesn’t mean that the criticism the prepaid market has long received is unwarranted. Papadimitriou points out that some prepaid cards have 10 to 20 different fees listed in their fine print, and while it’s possible to avoid many of them, it’s not always so easy for consumers to figure out how.

The lack of uniformity can make it very difficult to compare one prepaid card to another.

“It’s like going to Best Buy to get a TV, but instead of showing the price of each model, they’ve got a list of all these different charges that depend on what channels you like to watch,” Papadimitriou says. “Consumers can’t make sense of it.”

As such, competition in the market won’t necessarily lead to a more consumer-friendly product. While prepaid debit card providers may lower some fees, Papadimitriou believes they’ll replace them and that the fine print will only get more complicated and difficult for consumers to understand.

“We’re going to see the same thing we saw with credit cards right before the CARD Act was passed,” he says. “Unless the regulators intervene, it’s going to be a race to the bottom.”

Which prepaid debit cards are a good bet for consumers? Find out in MainStreet’s roundup of the best prepaid debit cards on the market.

—Jeanine Skowronski is staff reporter for MainStreet. You can reach her by email at Skowronski.jeanine@thestreet.com, or follow her on Twitter at @JeanineSko.

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