Prepaid cards have a certain reputation.
Because they don’t require a bank account, they have made a name for themselves as cash alternatives for low-income consumers who don’t have access to traditional financial institutions.
Yet that could be changing as prepaid cards evolve from an unconventional choice to a preference for consumers of all income brackets and ages. In fact, major banks are getting into the game with their own prepaid offerings, often extending the same protections against fraud or loss that other bank cards have.
By 2014, the amount loaded onto general purpose reloadable cards in the United States is expected to nearly triple from $57 billion (in 2011) to reach $167 billion, according to Mercator Advisory Group, an advisory firm for the payments and banking industry.
Here’s why the prepaid card market is heating up — and how to avoid getting burned by this largely unregulated market.
A budgeting tool for families
You can spend only the amount you load onto a prepaid card, which makes them popular for those who need some help keeping their expenses in check.
Tim Sloane, director of Mercator’s prepaid advisory service, says budgeting is a huge driver for the growth in prepaid cards.
“Surveys we’ve done in 2010, 2011 and now again in 2012 have all shown that 20 percent to 25 percent of all prepaid products are used for budgeting purposes across demographics,” Sloane says.
He says that while the reloadable card industry has been focusing on the unbanked and underserved as a target market, the demand is much broader than that.
Many more consumers using prepaid cards are middle class, even high-income earners and people budgeting together as a family, he says. That includes Sloane’s own household, where there’s a family prepaid card for eating out that gets reloaded each month.
“When the card is empty, we look at each other, and we say ‘OK, so who’s going to cook tonight?’” he says.
Convenient choice for young consumers
Prepaid cards also appeal to young people entering the financial system who haven’t grown up with traditional banking. In fact, these young consumers may not even see the cards as “alternative” banking but just a convenient option.
“Many young people just don’t see the value of walking into a brick-and-mortar bank, and they’re perfectly happy to have an account that acts and feels like a traditional debit or credit card but maybe comes with some good budgeting tools,” says Romy Parzick, manager of innovation and research for Center for Financial Services Innovation.
Younger adults like the technology features often associated with prepaid cards that keep them actively engaged in their finances, Parzick says.
Prepaid card provider NetSpend, for instance, offers “Anytime Alerts” that send a text the instant the money is available and let users track their card account balance after every transaction. GreenDot, meanwhile, can send texts with daily or weekly balances or reminders that the card’s balance is low.
Some prepaid cards also offer a convenient way for parents to give money to their teens and track their spending. Plastyc, a company that provides financial services to those without bank accounts, caters to this segment with its UPside Visa prepaid card, which allows cardholders to receive electronic payments from anyone with a U.S. bank account. Parents can get a real-time listing of their child’s purchases online.
Serving the anti-bank crowd
Some people don’t have convenient access to banks — and others just don’t like banks. With controversial banking account fees making headlines, many consumers are turned off by traditional financial institutions.
With bank accounts, overdraft fees can reach $30 to $35 for each offense. A Pew Research study found that members of a focus group of prepaid users would rather pay several dollars in monthly fees generally associated with prepaid cards than get hit with a $35 fee for overdrawing a checking account.
Pew also found that, while consumers in the study weren’t happy about paying fees, they saw them as upfront and expected, unlike banks’ fees, which felt like “gotchas.”
“There is indeed a segment of the market that is pretty fed up with financial institutions as they currently exist and they’re looking for alternatives,” Sloane says.
Prepaid cards offer a way for consumers who don’t want bank accounts, don’t want to travel with cash and who still want to shop online. Moreover, more employers and governmental entities are moving toward direct deposit and phasing out paper checks. Getting a prepaid card is a way for people who don’t use banks to get those checks electronically, says Laura Creamer, financial education specialist at CredAbility, a nonprofit counseling and education service.
How to avoid traps
While prepaid cards make sense for many, they have downsides — and consumers should know exactly what they’re signing up for, Creamer says.
First are the fees. Often these include re-loading fees, customer service fees, ATM withdrawal fees and maintenance fees. Unlike bank ATM cards or credit cards, there are no limits on fees for prepaid cards.
There are many affordable prepaid cards on the market. Yet others, particularly those backed by celebrities, are expensive to get and to use. For example, Magic Johnson’s MAGIC MasterCard, one of the latest celebrity-backed cards to hit the market, charges $4.95 for activation, $4.95 per month, $2.50 for each out-of-network ATM transaction (except for two free ones per month), $5.95 for a paper statement, $2 for each customer service call (except for one free call per month) and $4.95 to get cash from a retail store.
Then there’s the issue of protecting your money. Most prepaid cards are not covered by the federal laws that protect you from loss or fraud. You may not have the same options for recourse as you would with a debit or credit card. Some, but not all, of the cards are FDIC-insured.
“With a lot of these prepaid cards, if you have your whole paycheck on a prepaid card and you lose it, that’s it,” Creamer says.
The lack of protections and the rapid growth have caught the attention of the Consumer Financial Protection Bureau, which is considering establishing rules for the largely unregulated industry. The bureau has invited public comment on how to ensure that consumers’ funds on prepaid cards are safe and that card terms and fees are transparent. You have until July 23 to weigh in here.