May 15, 2013 at 4:45 AM ET
Prepaid debit cards, long synonymous with frustrating or even exploitative fees, are suddenly a pretty good deal. In fact, artfully deployed, a prepaid card can be used without any fees at all, and serve as a real substitute for a checking account.
It should come as no surprise, however, that there is still plenty of small print to worry about.
It would have been unthinkable a few years ago to put the words "good deal" and "prepaid card" in the same sentence. Called "general purpose reloadable cards" by the industry, prepaid debit cards that allow repeated deposits have always come with a laundry list of traps designed to grab $2-$3 at time from unsuspecting card holders: fees for loading, fees for withdrawing, fees for checking balances, fees for doing nothing. (A story in 2009 recounted an ordeal where a consumer was charged $2.95 when his transaction was declined (he claimed there were sufficient funds in his account), then was charged $1.95 when he called to complain.)
But banks are easing off some of those fees thanks to a number of factors — competition being chief among them. Large banks like Chase have jumped into the prepaid market, creating sizable networks for cardholders to enjoy fee-free ATM withdrawals. Walmart's aggressive steps into the market have helped consumers, too — card holders can deposit money onto cards at ubiquitous Walmart stores for free.
"We are seeing new entrants to the market with some pretty compelling offers," said Greg McBride of Bankrate.com, which recently issued a report about the turnaround in the prepaid debit market. "Over time, this will marginalize the higher-cost offerings that have characterized the prepaid marketplace so far."
That marketplace is expanding, even when some other parts of the plastic card market are shrinking, according to a report from bank consultancy Mercator Group. Gift card purchases dropped slightly from 2011-2012, but reloadable cards that act as pseudo checking accounts were purchased by 14 percent of U.S. consumers in 2012, up from 12 percent in 2011, the Mercator report said. The Consumer Financial Protection Bureau says $57 billion was loaded onto reloadable cards last year.
Even consumer advocates have noticed the kinder, gentler nature of the reloadable cards, and some even think they are a real alternative for the 10 million U.S. adults who currently don't have a checking or savings account.
"There has been tremendous price compression. We look at the fee schedules for these cards, and it isn't that horrible," said Jennifer Tescher, CEO of the Center for Financial Services Innovation. "We feel like these products are headed in the right direction, that (prepaid cards are) becoming a mainstream product. I am quite excited about the possibilities."
Transparency spurs growth
New prepaid cards come with a long list of benefits once limited to checking account users. Consumers can direct-deposit paychecks onto the cards (and in many cases, avoid monthly fees by doing so). The cards allow holders to make Internet purchases. They can sign up for online banking and pay bills online with the cards. In some cases, they can even write paper checks using the accounts.
McBride links growth in the market to a growing transparency about costs. In the past, consumers were often forced to buy the cards at grocery stores or other retail outlets without being able to see a full list of quirk fees which were sometimes only available online. But newer card issuers have adopted simplified, single monthly fee structures that are winning over consumers.
"The transparency of that one monthly fee is pretty compelling. You can easily quantify what the cost is going to be," McBride said. Even more compelling — that monthly fee may very well be less than the fee on a low-balance, entry-level, traditional checking account. For example, Bankrate's survey of 24 prepaid card issuers found that 15 had monthly fees ranging from $3-$10. Bank of America's entry-level checking account can cost $12 monthly. (In both cases, monthly fees can be avoided via direct deposit and other ways).
Prepaid debit cards are not a replacement for traditional checking accounts. Most critically, prepaid cards enjoy none of the standard federal consumer protections that credit and debit cards do. There are no refunds for fraud, for example, and there are no dispute resolution requirements. As a result, Internet message boards are full of consumers who complain that money has been stolen or is missing from their card balance, and who say they have no recourse.
Because of the lack of federal protections, prepaid debit card payments are similar to wire transfers — once the money is sent, it's gone — and Internet criminals have taken notice. Cards like the popular Green Dot have become a frequent, and powerfully elusive, way for Net criminals to steal from consumers. Nigerian scammers, for example, no longer need to trick a mark into visiting a Western Union and wiring money overseas. Many now trick victims into buying a Green Dot card instead, and sharing the secret payment code online. The Better Business Bureau, and NBC News' ConsumerMan, issued a warning about this recently.
Consumers also complain about poor customer service when they call to dispute deductions, or when they complain about missing money.
But it appears general purpose reloadable cards are here to stay. They have become popular with government agencies that disburse funds — such as unemployment benefits or tax refunds. Loading a card is safer and cheaper than mailing checks. And while they have a reputation for servicing consumers who are blocked from traditional banking, a growing number of middle-class consumers are using the cards. A report issued last year by the Aite Group says 34 percent of users hold college degrees, and one-third earn more than $45,000 annually.
Red Tape wrestling tips
People use pre-paid debit cards in two very different ways — they should be different products — and it's important to understand the distinction before buying a card.
Short-term purchasers use them as gift cards: To give a college graduate $100 to spend how he or she likes, for example. The card will be used and discarded. For that use, pick a card with low activation fees, even if it has a higher monthly fee. Just advise the recipient to use it quickly. Another slice of consumers use prepaid cards to spend at special events like vacations. They fall into the same category.
On the other hand, consumers who plan to use prepaid cards as a checking account substitute, and who plan to take advantage of a card's full slate of options — frequent ATM withdrawals, check deposits, etc. — should pay more attention to monthly fees when buying a card.
Many of these fees are not obvious from the card packaging, so it's worth doing a little research online to pick the best card for your purpose. Consumers Union warns consumers to consider the following potential costs: