A prepaid card company deceived consumers about their access to funds that were deposited on their cards, the Federal Trade Commission alleged in a new complaint, seeking injunctive relief and restitution for consumers.

What happened

Delaware-based NetSpend Corporation markets, sells, and services prepaid debit cards, managing cardholder accounts, processing card transactions, performing dispute and fraud management services, and handling customer service for cardholders.

The company's prepaid debit cards—including general purpose reloadable (GLR) cards—are sold nationwide. Consumers can load cash on the cards at retail locations and have their paychecks, government benefits, and tax refunds deposited directly onto the cards. Consumers can use the cards as they would a credit or debit card to make purchases, withdraw cash, and pay bills.

Targeting unbanked and underbanked consumers, NetSpend touted its cards as available for immediate use with guaranteed approval, and provisional credit provided for disputed transactions, the FTC alleged.

Marketing materials for the cards emphasized that consumers would have immediate access to the funds deposited on the cards, with claims including "Ready to use? Immediately," "instant access to money with no holds, no waiting," "Use it today!" and "No waiting!" Similar claims were made for the guaranteed approval of consumers, as well as the speed with which NetSpend addressed account errors and applied provisional credits for funds subject to such errors, according to the agency.

"Despite these claims, many consumers have been unable to use their cards immediately or access funds on their cards, including for prolonged periods of time—sometimes as much as weeks, or at all, meaning they never regain access to their own money," the FTC alleged. "Despite NetSpend's claim of 'guaranteed approval,' NetSpend's approval is contingent upon consumers meeting unexpected requirements; ultimately, many consumers have not been approved, and have lost funds they have already placed on the cards."

NetSpend's claims are also inconsistent with federal laws that apply to many payment card providers, the FTC pointed out, which require such companies to take steps before granting access to funds and approving cards. Many consumers had difficulty satisfying the identity verification process required by law and NetSpend before their cards could be activated.

Customers also experienced delays in obtaining access to payroll deposits, government benefits, and other funds deposited on their cards, the agency said, and NetSpend "often is slow to resolve account errors, and fails to provide or significantly delays providing provisional credits for account errors."

"In many instances, NetSpend blocks all use of consumers' cards until they are activated, completely cutting off consumers' access to their funds," the FTC alleged, and in some cases, the company continued to charge account usage fees ranging from $5 to $9.95 per month while consumers' accounts were blocked.

Many consumers use NetSpend cards as their only source of funds, the FTC told the court, causing them to suffer severe financial hardship due to the inability to access their money, such as eviction, repossession of automobiles, and late fees on bills. Thousands of consumers have complained about NetSpend's business practices, the agency noted.

For the alleged deceptive representations in violation of Section 5 of the Federal Trade Commission Act, the agency requested a temporary and preliminary injunction, a permanent injunction against future violations of the FTC Act, and monetary relief, in the form of rescission or reformation of contracts, restitution, refunds to consumers, and disgorgement.

To read the complaint in FTC v. NetSpend Corp., click here.

Why it matters

"Innovative financial products can offer many benefits to consumers," Jessica Rich, director of the FTC's Bureau of Consumer Protection, said in a statement. "However, when companies promise consumers 'immediate access' to their funds, they need to honor those promises." The FTC's complaint emphasized that many NetSpend customers do not have bank accounts and were left in severe financial straits by the allegedly misleading representations made by the company. "If you work in the financial services sector or have clients interested in alternative payment methods, this is a case to watch," the agency noted in a blog post about the action.