The ads for NetSpend, one of the country's largest providers of prepaid debit cards, promised "immediate access to your funds." But that's not always the case, the FTC charges.
In its deceptive marketing lawsuit, the FTC alleges NetSpend denied or delayed activation of cards for thousands of reloadable card customers. This prevented them from accessing money they'd put on the cards or was directly deposited from their paychecks or government benefits.
The FTC is asking the court to order NetSpend to return all the money it owes customers and guarantee that in the future it will provide cardholders with timely access to their funds.
"Innovative financial products can offer many benefits to consumers. However, when companies promise consumers 'immediate access' to their funds, they need to honor those promises," said Jessica Rich, director of the FTC's Bureau of Consumer Protection, in a statement. "We're committed to protecting consumers - particularly those who are financially strapped - from deceptive practices involving their payment choices."
NetSpend denies any wrongdoing. The company blames federal regulations for much of the customer dissatisfaction. In a statement, the Texas-based company says it intends to "vigorously contest" this complaint and has substantial defenses to do so.
NetSpend markets its cards - in both English and Spanish - to those who don't have traditional checking or savings accounts. The ads claim the card is "better than a bank, and safer than cash."
Customers can use the card to make purchases anywhere Visa or Mastercard is accepted, pay bills and withdraw cash from ATMs. NetSpend promise quicker access - "up to 2 days faster" with "no holds" and "no waiting" - when paychecks and government benefits are directly deposited into the account.
Some unhappy customers complained to the FTC and the Better Business Bureau that they were forced to wait weeks before they could use their NetSpend card - if at all. Some people say they were never able to get access to their money.
'Guaranteed approval' is not guaranteed
NetSpend promises "guaranteed approval" with no credit checks. But in fact, the lawsuit charges, approval is not a sure thing.
"Netspend's approval is contingent upon customers meeting unexpected requirements; ultimately many consumers have not been approved, and have lost funds they have already placed on the cards," the FTC alleges.
All customers are required to go through a sign-up process to activate the card, even those who buy the card at a store and load money on to it at the time. To do this, they must provide their name, address, date of birth and Social Security number. Those who do not have a Social Security number are often required to submit other documents, such as driver's license, utility bill or employer pay stub.
Even when this information is submitted - in some cases, multiple times - the cards are not always activated.
Unable to use their cards and without access to other funds, many of these customers experienced "severe financial hardship," such as eviction, auto repossession, late fees on bills and the need to borrow money from relatives to pay for basic living expenses, the FTC's complaint alleges.
The lawsuit also asserts that NetSpend continued to charge customers a monthly usage fee of $5 to $9.95, even when they could not use all or part of their money.
NetSpend contends that it was simply complying with federally-mandated obligations under the USA PATRIOT Act to confirm the identity of those acquiring the card. In a statement, the company said:
"NetSpend takes seriously and carefully adheres to these legal mandates to fight identity theft, money laundering and terrorist financing and believes that no one was deceived or harmed by the company's compliance with these legal obligations. The complaint also relates to NetSpend's fraud controls, which are required by federal law, including the FTC's own Red Flags Rule, to monitor accounts for account takeover and possible fraud in order to protect consumer funds. These processes are not deceptive, but instead comply with the law and protect consumers."
Other issues noted in the lawsuit
NetSpend promises cardholders that when there's a disputed charge, they will receive a provisional credit while the error is resolved. In many cases, the FTC contends, the company did not grant those credits.
Customers also complained that it was difficult or impossible to contact the company when there was a problem. They say they had to call NetSpend's customer service multiple times, were often put on hold for more than an hour and had to send requested documents (such as identification) repeatedly to deal with blocked accounts.
The bottom line
Prepaid cards are growing in popularity. In fact, they're one of the fastest growing consumer financial products in the country, according to the Consumer Financial Protection Bureau (CFPB). The CFPB predicts that by 2018, American consumers will load $112 billion a year onto their general purpose reloadable cards.
The market is growing so rapidly because these cards are no longer just for people without bank accounts. Prepaid cards are becoming a popular alternative to checking accounts because there's no minimum balance requirement and no overdraft fee (in most cases). The cards are also a convenient way to give money to teenage children or students away at college.
Many of these cards provide great value and service with a minimum of fees. Consumer Reports recently rated Prepaid Cards.
Before you chose a prepaid card, read the terms and conditions. What are the fees? And check the company's track record with the Better Business Bureau. That's especially important if you'll have your paycheck or government benefits deposited on that card.
The Federal Trade Commission has information on prepaid cards on its website.