Prepaid card fees are often considered unreasonably high, but that is rarely the case — even the ill-fated Kardashian Kard, which was so vilified for its fees that it shut down within a month of its launch, wasn't out of line in its pricing.

"The Kardashians provided a great punch line and a point of reference, but if you really examine their card, they had a high upfront fee, but everything after that was free," says Ben Jackson, senior analyst for Boston-based Mercator Advisory Group's prepaid advisory service.

The Kard's high up-front fee was just a lumping of six to 12 monthly fees, paid in advance. The heavy scorn heaped upon the Kardashian sisters in November of 2010 ultimately miscast the Kardashians' intentions, Jackson says.

Jackson examined the Kardashian Kard flareup and other prepaid card misconceptions during his "Debunking the Myths of Prepaid" webinar June 19.

The Kardashians chose to provide a card that operated on a "gym membership model" in which users paid all of the monthly fees ahead of time, Jackson says.

The Kardashian sisters' celebrity status drew the wrong kind of attention to the product. "They got nailed because they were the Kardashians," he adds.

As a result of the product's very public failure, program managers have become cautious about linking a celebrity name to a card, and have avoided the up-front fee plan in favor of monthly payments, Jackson says.

Prepaid cards are prone to several other misconceptions.

Contrary to popular belief, prepaid cards aren't an anonymous purchasing tool that criminals or terrorists would find beneficial for covering their tracks during illegal activities, Jackson says.

Prepaid cards have load limits and activation requirements that would make criminals cringe, Jackson says. Cardholders must provide their name, birth date, address and Social Security number.

Prepaid card transactions can be traced and program managers have various limitations in place for funding amounts, transaction amounts and balances, Jackson says.

Another myth is that merchants want to pocket the cash from people who buy prepaid gift cards but never use them.

Merchants pay a heavy price for the "breakage" when gift-card holders do not redeem, Jackson says.

Consumers, on average, spend $23 more than the face value of the gift card when redeeming it, Jackson adds. To make matters more complicated, cards never redeemed become a permanent liability on the merchant's books, while those that are only partially redeemed stay active in the accounting system, he says.

Prepaid detractors insist that banks and other prepaid card marketers use the cards as "a tool to gouge the poor," Jackson says.

The "margins are thin" in prepaid, Jackson says. "It is an unfair comparison to place prepaid cards with pre-checking, because prepaid fees stack up well against checking accounts."

Anyone who thinks prepaid card issuers or program managers somehow avoid network or federal scrutiny hasn't looked at the facts, Jackson says.

The Dodd-Frank Act established regulations covering fees and interchange rates. The legislation also states that internal auditing of prepaid transactions has to be the same as other payment card transactions.

Federal regulators recently fined First California Bank and Achieve Financial Services in their roles as general-purpose reloadable card providers for how they used the cards to distribute federal benefits payments, Jackson says.

"They were essentially saying these providers fall under the bank regulators' umbrella," Jackson says.

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry