To the naked eye, general purpose reloadable prepaid cards function much like long-established credit and debit cards and have quickly gained traction with consumers, especially those who have been shut out from traditional banking options. In fact, about 23 million consumers use prepaid cards regularly.

That’s according to a new report [PDF] from Pew Charitable Trusts that examines consumers’ knowledge, attitudes, and perception based on whether or not they have a checking account.

According to the latest “Banking on Prepaid” report, prepaid card use is becoming more and more common among individuals, even those who have bank accounts.

Despite advocates’ concerns over some fee-laden cards, use of the banking product increased more than 50% between 2012 and 2014.

While adoption of the products by those already served by traditional banking has increased, it’s consumers who fall into the “unbanked” category that drive the industry.

These consumers often use the prepaid cards more like traditional checking accounts: checking their balances more regularly, reloading more frequently, and registering their cards more often than banked cardholders do.

The cards also provide a welcome budgeting tool for many individuals, the report finds.

Because most of the people who use the cards are unbanked and have annual household incomes below $50,000, they tend to use the cards as a way to help control spending, stay out of debt and avoid overdraft fees.

Although the use of prepaid cards has steadily increased in recent years, some users remain confused by terms and conditions associated with the products.

For example, the Pew report found that most prepaid card users do not know whether their funds are FDIC-insured or whether their cards have an arbitration clause.

According to Pew, nearly all cards carry FDIC insurance, and about 77% of the cards studied included a binding arbitration clause.

“The availability of these features depends on the policy of the prepaid card manager, and consumers must read and understand their account agreement to determine their status,” the report states.

Still, many prepaid card holders who are covered by liability protections don’t know it.

Such safeguards minimize or eliminate a cardholder’s liability for unauthorized use if a card is lost or stolen — but only if the card is registered and the problem is reported in a timely manner.

“Unbanked prepaid cardholders tend to be less knowledgeable about this protection than those who also have bank accounts,” according to the report.

Pew says the reports findings, both in the sheer use of prepaid cards and their limited safeguards, give credence to the fact that the products should have more regulatory protections, such as those proposed by the Consumer Financial Protection Bureau in November 2014.

“The findings in this report demonstrate the need for the CFPB to finalize its proposed rules on prepaid cards,” the report states. “This is especially important for the unbanked, for whom prepaid cards are often their only transaction account, to ensure that these cards are safe, transparent financial products with uniform protections against theft, loss, and deception.”

The CFPB proposed a number of rules intended to extend the protections currently enjoyed by checking account and credit card users to the prepaid card market, including:
• Monthly statements or free online access to account info.

• $50 limit on fraudulent transactions for cardholders who report suspicious activity in a timely manner.

• Standardized disclosure forms explaining all relevant fees and surcharges.

• Limits and regulations involving prepaid debit cards that offer credit in the form of overdraft protection.

“Ensuring the safety and transparency of these financial products is critical to the health of this fast-growing market and to the financial well-being of its customers,” the Pew report states.

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