The Rise of Online Prepaid Cards in Class Action Settlements: A Double-Edged Sword

Online prepaid cards have emerged as a prominent method for compensating consumers impacted by class action lawsuits. While they offer a modern solution to payouts, critics raise concerns about the potential for unfair profit by fintech companies and claims administrators, turning what should be a straightforward process into a puzzling experience for many consumers.

The Allure of Digital Prepaid Cards

In December, Callista Womick, a consultant from Asheboro, North Carolina, received an email offering her a digital prepaid card after a class action lawsuit against Equifax. This card promised to deliver her share of damages from a data breach that affected 147 million Americans. Womick’s payout? A mere $7.44. While the digital card was legitimate, Womick described using it as a “brain-teaser,” revealing the challenges many face when navigating these new forms of compensation.

Consumer Confusion and Potential Loss

Donna Lowe, a 911 dispatcher from Atlanta, also encountered difficulties with her digital card. After activating her card, she eventually forgot about it amid confusion about how to spend it. Unfortunately, after just six months, the card began incurring a hefty $5.95 monthly inactivity fee, devouring her payout before she had the chance to use it. This experience echoes a broader issue, with estimates suggesting that $300 to $400 million from digital prepaid settlements remains unspent—a concept in industry terms known as “breakage.”

The Financial Stakes of Breakage

The irony of breakage is significant. Unlike uncashed paper checks that return funds to settlement pools or related non-profits, funds from unused digital cards favor the issuing fintech companies and administrators. The rise of digital payouts has led to a $425 million settlement like Equifax’s opting for these cards all too often, raising concerns over transparency and consumer losses.

The Shift from Paper to Digital

In recent years, the trend towards digital payouts has been largely driven by the high costs of paper checks and the inefficiencies associated with mailing. After a 2021 lawsuit settlement, administrative costs for notifying claimants fell drastically from an estimated $20 million to just $3.9 million when electronic methods were used. However, as the paperless trend grows, so do the complexities and pitfalls associated with prepaid card payments.

Inadequate Oversight and Regulation

One prevailing issue is the lack of oversight for digital prepaid cards. Although the federal Card Act restricts inactivity fees on standard gift cards, these protections don’t extend to cards issued for litigation settlements. Blackhawk Network, a significant issuer of these cards, is free to impose fees potentially wiping out consumer payouts within months.

Moreover, transparency surrounding breakage remains a significant gap. Most courts do not demand disclosure of how much of the fund reaches the consumers versus how much goes to attorneys and administrators, further complicating accountability.

Claims Administration in the Crosshairs

Recent legal actions have emerged against major claims administration companies, alleging they profit from "revenue sharing" arrangements through digital card issuance. Allegations suggest these companies engage in undisclosed agreements that keep class members unaware of the hidden kickbacks benefiting the administrator while diminishing the funds available for claimants.

A Hidden World of Kickbacks

The relationship between administration companies and fintechs raises eyebrows, with payments routed from unused card balances essentially flowing back to the administrators’ profits. Todd Hilsee, a former claims administrator, found a concerning pattern of hidden financial gains which could potentially mislead both the courts and the claimants. Notably, instances have surfaced where administrators were offered rebates contingent upon using certain card distribution methods—often to the detriment of class members.

The Role of Banks and Interest Earnings

Banks also play an important role in the class action landscape, often benefiting from interest earned on unspent settlement funds. While funds ought to be credited to class members, claims administrators sometimes absorb these earnings, further complicating the financial integrity of settlements.

Scaling Concerns for Future Settlements

As more lawsuits choose electronic disbursements, experts warn that future claimants could face escalating challenges and losses associated with digital prepaid cards. The emergence of firms like Digital Disbursements demonstrates a shift towards offering claimants better options, with some companies negotiating for lower inactivity fees or extended timelines before penalties kick in.

Clarity and Accountability

While the use of digital payments in mass class actions has innovative potential, it is critical to address the operational issues that arise. Enhanced communication strategies, transparent disclosures about the financial processes accompanying digital card usage, and legislative efforts to regulate inactivity fees could lead to a fairer, more equitable system for all involved.

Ensuring Fair Practices in Class Actions

In light of these revelations, it is clear that consumer awareness, judicial oversight, and enhanced accountability are necessary to ensure that digital prepaid cards serve their intended purpose: compensating those wronged by corporate misconduct without creating additional burdens or confusion.

Navigating the complexities of online prepaid cards in class action settlements may require further reform, but the potential pitfalls and realities must be fully understood by all parties involved.