Prepaid card debacles, from BofA to the Kardashians

February 27, 2022 9:00 PM

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Since the prepaid card’s arrival more than 20 years ago, numerous industry participants have experienced high-profile snafus.

The latest is Bank of America, which is under investigation by federal banking regulators in connection with its role as the exclusive provider of prepaid debit cards to recipients of government benefits in California.

Both at BofA and elsewhere in the prepaid industry, the exploitation of cards by fraudsters has sometimes caused headaches. Other problems stemmed from technology glitches that temporarily prevented cardholders from accessing their money.

What follows is a look at seven instances since 2010 of prepaid card companies that encountered large-scale consumer-related problems.

David Paul Morris/Bloomberg

Bank of America

In 2010, Bank of America entered into an exclusive contract with California’s Employment Development Department to administer the state’s jobless benefits program and distribute the funds to recipients on prepaid cards.

The contract was a money-loser from the outset; between 2011 and 2020, the Charlotte, North Carolina, bank reported total losses of $240 million from the program, according to BofA’s testimony to state lawmakers in California.

Then came a huge wave of pandemic-era fraud. State officials estimated last year that $20 billion out of $180 billion in benefits paid since the start of the pandemic went to fraudsters. BofA’s response, both on its own and at the direction of state officials, included freezing hundreds of thousands of customer accounts, and that has landed the bank in hot water.

Last June, a federal judge issued a preliminary injunction in litigation against the bank that required BofA to reopen all customer claims it had denied using a fraud filter it designed to weed out criminals.

Another issue in the litigation has been the lack of EMV chips, which offer greater security than magnetic stripes, on BofA-issued prepaid cards in California prior to July 2021.

American Banker reported this week that both the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency have been investigating BofA, and that the investigations are in their later stages.

On Tuesday, BofA said in a securities filing that its role in the California program and in implementing government assistance programs elsewhere “may lead to … judgments, orders, settlements, penalties and fines.”

Comerica

In 2018, Comerica Bank shut down a service that it was offering with the U.S. government after fraudsters drained the accounts of hundreds of veterans and retirees.

The Dallas bank discovered a security breach and fired at least one employee after the veterans, Social Security recipients and disability beneficiaries said that criminals stole their money.

The fraud occurred in the Direct Express program, which allows unbanked people to access federal benefits on a prepaid card.

The service that Comerica discontinued allowed cardholders to withdraw funds even after a card was reported as lost or stolen. Criminals would report cards as lost or stolen, and then change PINs and route payments to MoneyGram locations, cardholders alleged.

But even though that particular service was shut down, the Direct Express program continues to operate. And despite the fraud, the U.S. Treasury Department announced in 2020 that Comerica would continue to operate as the program’s financial agent through 2025.

Green Dot MoneyPak

Green Dot’s MoneyPak prepaid card was discontinued in 2014 after it proved vulnerable to fraudsters.

The scams, which drew the attention of a Senate committee, often involved phone calls to consumers, claiming that they owed money and needed to pay using a MoneyPak card. Victims would purchase a card, scratch off a number on the back and provide the number to the caller, who could then access the funds.

Green Dot, a large prepaid card issuer that also owns a bank, estimated in 2015 that the decision to stop offering MoneyPak cards would shrink its operating revenue by $10 million to $40 million.

Green Dot relaunched MoneyPak in 2016, saying that it had designed a new system for mitigating potential misuse.

RushCard

Customers of RushCard were temporarily locked out of their accounts in 2015 after the prepaid card company switched payment processors.

More than 442,000 consumers were affected by the technical glitch, the company later told Congress. Nearly one-third of them could not access their accounts for several days.

RushCard, which was co-founded by the hip- hop mogul Russell Simmons, eventually agreed to pay $20.5 million to settle thousands of consumer claims.

RushCard’s parent company, UniRush, was sold to Green Dot in 2017 for roughly $167 million.

Green Dot-Walmart

In 2016, thousands of Green Dot customers experienced another major technical glitch during the migration of payment processing services.

Green Dot ultimately estimated that more than 58,000 customers were affected by problems that lasted for days.

Consumers who used Green Dot-issued, Walmart-branded cards were unable to make transactions that should have been approved. Some customers could not activate new cards or access their account balances online.

Green Dot initially stated that the processing problems were not preventing customers from making purchases or withdrawing cash from ATMs, but it soon backtracked from that comment and acknowledged that the problems were more significant.

Netspend

The Federal Trade Commission sued the prepaid card issuer Netspend in 2016 for allegedly deceiving customers in its advertising.

Prepaid card companies are required to verify customers’ identities before making funds available to them, which can result in delays. But Netspend advertisements allegedly included claims that funds would be available right away.

According to the FTC’s lawsuit, many Netspend customers were unable to access their money for long periods of time.

In 2017, Netspend agreed to provide $53 million in monetary relief to settle the lawsuit. It did not admit wrongdoing as part of the settlement.

Kardashian Kard

In November 2010, the reality TV stars Kim, Kourtney and Khloe Kardashian launched a prepaid card that featured an image of the three sisters.

“Now our fans will be able to take us with them everywhere,” the sisters said in a press release before the product’s launch.

But less than three weeks later, then-Connecticut Attorney General Richard Blumenthal criticized the product for what he described as “outrageous” fees and marketing efforts aimed at teenagers.

The Kardashian Kard, which was issued by University National Bank in St. Paul, Minnesota, cost $9.95 to purchase and also charged monthly fees of $7.95. There was also a $1 fee to add money to the card, a $1.50 fee to speak with a live operator and a $2 fee for each bill paid using the card.

A few days after Blumenthal’s remarks, University National Bank announced that all sales of the Kardashian Kard were being terminated, and that existing accounts would be closed. The bank said that only 250 consumers had purchased the card, and that they would receive a refund of their balances and any fees they paid.

The same day, the Kardashian sisters pulled out of an agreement that allowed the bank to use their likenesses, according to a letter written by their lawyer.

"I just don't think it really fit with our brand, so we are moving on," Kim Kardashian said in a TV interview the following day.