The Banks’ Great Plastic Hope: Prepaid Debit Cards

Over the years, the primary way banks make money has shifted from collecting interest on loans to collecting fees from customers using their debit and credit cards and other bank products. As regulations make it more difficult to collect some fees—namely, debit card overdrafts—banks are growing more interested in prepaid debit cards.

Why? A Globe and Mail story puts it succinctly:

They’re the least-regulated plastic products on the market.

While most prepaid debit cards don’t have terms quite as bad as celeb-touted total ripoff Kardashian Kard, which was killed off for being predatory and (even worse) resulted in bad publicity, most of these cards come with tons of fees. Studies have shown that using such a reloadable, disposable card, which can be used just like a standard debit card but isn’t attached to a bank account and requires no I.D. or credit history, typically incurs $40 to $80 in fees in the first two months of usage.

It is understandable why banks like these cards—Big fees! Few pesky regulations! No strings attached!—but what consumers would be naïve enough to think such a product is a good idea? Based on whom these prepaid cards are being marketed to, the answer is: teenagers.

As the Globe and Mail story points out, these cards are often aimed at kids ages 13 to 15 and feature the likes of the actors from the “Twilight” movies. Not long ago, there was even a card emblazoned with Hello Kitty. A big reason the Kardashian’s card caught hell was because it was being pushed primarily on youngsters who are impressionable enough to think that the high-flying Kardashians are good consumer role models.

The WSJ writes that banks are expecting to lose billions of dollars due to the fees they’ll no longer collect on debit card overdrafts and interchange fees in the post-reform era. To make up some of the losses, they’re putting a big push behind loosely regulated, fee-heavy prepaid cards. In some cases, banks seem to be hoping that prepaid cards will replace traditional accounts and debit cards:

Banks are pursuing a number of alternatives for prepaid cards, including potentially using them as a debit-card replacement for low-income customers who keep small checking-account balances and don’t make many transactions. Such customers aren’t very profitable for banks, and a prepaid card could cost banks less than checking accounts to maintain.

So in addition to teenagers, the other group being targeted for prepaid debit cards is poor people. If the main two groups attracted to these kind of cards fall into the category of naïve and/or desperate, what does this say about the product?

Also, the thought has had to occur to banks that getting teenagers accustomed to prepaid cards (and their fees) while they’re young increases the likelihood that they’ll keep using such cards (and not balk when they’re confronted with fees) as they grow up. Paying fees left and right also increases the likelihood that when teenagers grow up, they’ll fall into the other key demographic ripe for prepaid debit cards: They’ll be poor.

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gpatrick900

Some prepaid debit have good rates. I know couple of prepaid cards that have decent rates especially if you have to start paying for a checking account. If the bank has a decent rate it might be worth it. They could actually replace there in-house debit card by allowing you to transfer money to & from the prepaid debit card at no cost.
jennifernbpca

Your piece glosses over many of the real facts about prepaid cards. Prepaid cards are strongly regulated. They are issued by highly regulated banks or financial institutions and offer solid consumer protections. Prepaid cardholders also receive FDIC pass through insurance on the pooled account.

Other data contradicts your assertion that consumers are charged an average of $40-$80 in the first month of fees. A 2009 survey conducted by the Bretton Woods Foundation (http://www.nbpca.org/~/media/E20DBBF854B34706928249B15317C96A.ashx) found that typical prepaid cardholder spent $108-$320 on fees per year, that’s $9 -$27 per month. Costs for alternatives such as a basic banking account or check cashing were much higher.

Prepaid cards are highly valuable financial products that can help teens learn about responsible money management and allow underbanked individuals develop better financial security by entering into a mainstream financial system. Your assertion that a product developed for people that are “poor” and “desperate” is predatory and is insulting to consumers. Many underbanked consumers are looking to make smart money management choices along with the rest of the population and they have found that prepaid is a safe and smart choice. We are all happy that the Kardashian card is off the market. Consumers said “no thanks” to high fees. We have all learned plenty in the past few years about smart money management. Let’s give consumers more credit for choosing financial products that meet their needs. Jennifer Tramontana, NBPCA
Brad Tuttle

There are plenty of ways to learn about responsible money management without paying $100, $200, $300 and up per year in fees. If you’re paying these sort of fees, I’d say you actually have a lot to learn.

As for the question of who this product is targeting, we’re talking about cards that are clearly marketed to unbanked and underbanked consumers. Do you know many wealthy folks who fit that description?
http://popeye7777.wordpress.com popeye7777

Wow Brad is defensive and wrong. Honest hard working educated Americans need prepaid debit cards too. Before I found prepaid debit cards I spent $75 a month cashing my paycheck, $15 a month buying money orders to pay my bills and had no access to plastic. I couldn’t travel, shop on the internet, get emergency cash, or buy gas at night. My prepaid card offers free direct deposit (saving me $75 a month in check cashing fees) no monthly fee when I deposit $350 a month (which I do) and I pay my bills with my prepaid card and save another $15 a month. The only fee I pay is $2.50 to access cash at an ATM or $1 to get cash back at the grocery store. My prepaid card cost me less than $10 a month on average so it saves me $80 a month. My old bank account at a major bank cost me $12 a month when I made no mistakes. My story is not that unusual in today’s economy. For 18 months every month my employer direct deposited my paycheck into my checking account on the first and 15th. I had a student loan and a car loan that were set up to auto withdrawal their payments on the 2nd of the month. In July my employer went bankrupt and over 100 payroll checks bounced I was one of those 100 people. When my auto deductions came in on the 2nd of the month it caused a series of checks to bounce at $35 each and I became so far overdrawn I had to stop using my bank account and turned too prepaid. Prepaid is forcing me to live within my budget and never lets me spend money I don’t have. My prepaid card has no monthly fee, customer service fee, card issuance fee, card activation fee its very affordable. I am afraid if I put the companies name my story won’t get posted but I found it by searching Prepaid MasterCard No Monthly Fee.
jennifernbpca

To be clear, the major banks are moving to a monthly fee for a checking account that could average to $60-$120 a year just for the privilege of having the account. Low-balance checking accounts also have other fees for transactions and just one overdraft is about $30. A low-balance checking account can easily cost a consumer more than a prepaid card.

Underbanked consumers number 60 million in this country. They can be underbanked for many reasons – poor credit, not enough credit, they don’t trust banks, there are few or no banks in their neighborhood or they feel they have been burned by banks in the past with overdraft charges and fees that they believe to be hidden. These consumers want to be treated with respect and they want value, transparent fees and convenience when it comes to financial services. They do not view themselves as desperate. (See work by the leading think tank on underbanked issues, CFSI, to learn more.)

Underbanked consumers choose a prepaid card over a bank account or check cashing relationship because the card can be purchased and reloaded at tens of thousands of retailers, far more locations and with more convenient hours than banks. And unlike most checking accounts, no credit check or ChexSystems check is completed. Direct deposit is also available, just like a checking account, so the cards are an ideal alternative to check cashing or waiting in lines at banks.