Column: More refunds are being made with prepaid debit cards. Is that a good thing for consumers?
Seal Beach resident Tom Hazelleaf canceled his 90-year-old mom’s Spectrum cable service after she moved recently to an assisted-living facility.
He schlepped all her cable gear to a Spectrum store, where he was told that because the company bills in advance, his mom was owed a refund of just over $60. The rep, he recalled, said the money would be restored to her credit card.
It wasn’t. Instead, Hazelleaf, 70, received in the mail a prepaid Mastercard debit card worth the amount due. It says it “can be used everywhere Mastercard debit cards are accepted,” which acknowledges there are places it can’t be used.
And a close look at the fine print reveals that if the card goes unused for six months, a monthly $3.50 “maintenance fee” kicks in, eating away at the card’s value.
“What’s really irritating,” Hazelleaf told me, “is that for many years they managed to automatically charge my mom’s credit card account. But now that they have to give money back, they don’t use the same simple method. They do this instead.”
Spectrum, the dominant pay-TV provider in Southern California, owned by cable heavyweight Charter Communications, is by no means alone in this practice. (Full disclosure: The L.A. Times partners with Spectrum for a nightly cable news show.)
A growing number of companies in numerous industries now routinely provide rebates and refunds in the form of prepaid debit cards.
It can be convenient for any consumer who doesn’t mind toting around a bunch of plastic. But it’s hard not to suspect that the system is more for the benefit of the businesses involved rather than their customers.
According to some estimates, paper checks are twice as expensive for a business to process and mail out as prepaid cards, so big companies such as Spectrum can save piles of cash.
Meanwhile, financial firms issuing the cards on businesses’ behalf gain access to potentially millions of new customers, who instantly become fair game for marketing campaigns.
Perhaps most important, studies show that prepaid cards frequently are forgotten by recipients. In such cases, the unused money can be turned over to state authorities or can be consumed by the card issuer in the form of high-priced maintenance fees.
“One of the biggest problems here is that you may not know a prepaid card is coming,” said Linda Sherry, a spokeswoman for the advocacy group Consumer Action.
“It could be lost or stolen, and you wouldn’t be any wiser,” she said. “You might just think your credit card was refunded and not give it another thought.”
The fine print that accompanied Hazelleaf’s card highlights the minefield that consumers have to navigate in accessing their own money.
“Your funds will never expire, regardless of the expiration date appearing on the front of your card,” the terms and conditions declare.
However, “if you attempt to use the card or add funds to your card after the expiration date, the transactions may not be processed,” the terms continue.
“If there is a balance remaining on your card upon expiration, a new card may be issued to you. You must activate any newly issued card in order to access the funds.”
You have to root around in the footnotes of the document’s fee schedule to discover that “a card maintenance fee will be charged to your card on a monthly basis, starting in the month following the card expiration date embossed on the face of the card,” which is typically six months from the day the card was issued.
That monthly fee is $3.50, which adds up to $42 a year.
In Hazelleaf’s case, that means if his 90-year-old mom doesn’t blow through the debit card in six months, it presumably will start losing value. And if she wants to resume spending after six months, she’ll have to go to the trouble of asking for, and activating, another card.
But wait, there’s more!
The card issuer, Minnesota-based Sunrise Banks, tucked an arbitration clause into the terms, so you automatically give up your right to sue the company or join a class-action lawsuit.
The terms say personal information the bank collects can include your Social Security number, birth date, address and purchase history. They also say it may share your information “for our marketing purposes — to offer our products and services to you,” and you have no ability to stop this sharing.
This is all suddenly very complicated for a simple refund.
Dennis Johnson, a Spectrum spokesman, said the company will issue a refund to a customer’s credit card, but only if requested to do so.
“We automatically make most refunds using these wire cards to get funds back in the hands of customers faster than sending a paper check refund,” he said.
“The customer has the option at any time to convert the card to a check or transfer of funds into their bank account if they prefer, or to use it as a Mastercard debit card,” Johnson added, although some consumers might see those extra steps as a hassle.
Seth Eisen, a Mastercard spokesman, said maintenance fees are charged after a certain amount of time has elapsed because “there is a cost for maintaining the account and access to it.”
That may be true, but it’s very hard to believe the cost of storing an account in a computerized database could come anywhere close to $3.50 a month. A penny or two may be more like it, if that.
Eisen said if I wanted more information, I’d need to contact the card issuer, Sunrise. I tried to do that, more than once. They never responded.
Some things to bear in mind:
- While there are laws against gift cards imposing fees, those laws don’t apply to most prepaid debit cards.
- Some prepaid cards are “closed loop,” which means they can only be redeemed at a particular business.
- Most are “open loop” and can be used at a variety of businesses. These cards usually bear a card-network logo, such as Mastercard or Visa.
- Using an open-loop card means your transactions are being monitored and being filed away in databases. Many companies pay for such information.
It seems to me there’s an easy solution to this problem. Any time a business has to issue a refund, ask the customer how they want the transaction made.
Many perhaps will favor the convenience of prepaid cards. More than a few, however, undoubtedly will prefer the simplicity of straight-to-plastic refunds or paper checks.
The key point here is consumer choice. The way that works is by providing the choice upfront.
Not after the card arrives in the mail.