With a growing number of Americans using reloadable prepaid
cards as budgeting tools, consumers should check out the fine
print, as the costs associated with the cards are all over the map,
according to a 2012 Bankrate.com/CreditCards.com Prepaid Cards
Survey.
Last year, about $183 billion was loaded onto reloadable prepaid
cards, financial products that look and act like debit cards, but
use preloaded funds rather than money drawn directly from a bank
account. The market has exploded in recent years, with analysts
predicting the prepaid market will be more than 36 percent
larger in 2013 than it was in 2007, according to payments
consulting firm Mercator Advisory Group. As a result, consumers
have a lot to choose from, both in terms of features and in
price.
Out of the 18 prepaid cards in the survey, monthly service fees
are the norm for 12 of them. On the high end are the First
California Bank Achieve Card MasterCard and the Bancorp Bank
AchieveCard Visa with a $9.95 monthly charge. Others charge between
$2.50 and $5.95 per month, while six cards have no monthly fees at
all.
However, monthly service fees are only a small part of the
picture. For example, the PNC Bank SmartAccess Prepaid Visa Card
comes with a $5 monthly service fee, but has few other fees
attached. On the other hand, the Bancorp Bank RushCard-Pay As You
Go card has no monthly service fee, yet charges for almost
everything else, including ATM withdrawals, balance inquiries,
point-of-sale transactions and signature purchases.
Eleven of the 18 cards come with an activation fee, ranging from
$3 to $14.95, though two MetaBank cards -- the NetSpend Pay As You
Go and BlackHawk Network PayPower -- waive that fee if you get the
cards online. Eleven issuers charge ATM withdrawal fees, which
range from $1.50 to $2.50 per withdrawal. However, some issuers
will waive the fees under certain circumstances, such as if users
use direct deposit or a bank transfer to load the cards.
Even service can come at a cost, as seven cards in the survey
come with fees for live customer service, ranging from $0.50 to
$4.95, though a couple offer one or two free calls a month before
charges kick in. See prepaid card survey chart for a full breakdown
of fees.
A shifting market
While prepaid cards have been marketed in the past to people
without bank accounts, that is now beginning to change.
Approximately 15 percent to 20 percent of people say they
use prepaid cards as a budgeting tool, says Ben Jackson,
senior analyst for the Mercator Advisory Group. For example, a
consumer may put money on a card for entertainment expenses. When
the money runs out, the entertaining for the month stops.
One person who has done this is Marieta Hauser of Ulysses,
Kansas. Hauser has used prepaid cards on Internet and travel
purchases. "This is a way I can control the costs because when it's
out of money, it's out of money," she says.
Some parents are even using prepaid cards as a way to distribute
allowances or provide funds to children away at college. Another
factor fueling the growth of prepaid cards is security. Some who
feel uncomfortable using their credit cards for online purchases
might be more willing to use a prepaid card since the risk is
limited to the amount that's on the card.
Finally, prepaid cards appeal to certain segments of the
population. Eighteen percent of members of Generation Y use prepaid
cards, says Beth Robertson, director of payments research for
consulting firm Javelin Strategy & Research. "Younger consumers
are often not eligible for credit cards, so prepaid gives them the
flexibility of the card and the ability to not have to carry cash,"
Robertson says. Also, 18 percent of the underbanked population use
prepaid cards regularly, Robertson adds.
Criticisms remain
But all aren't in total favor of the cards.
One criticism is that prepaid cards don't have the same
protections as debit and credit cards. If your credit card is
stolen, the Fair Credit Billing Act limits liability for
unauthorized credit card charges to $50. The Electronic Fund
Transfer Act limits losses to $50 for debit and ATM users. While
some prepaid card issuers offer comparable protections, it's up to
the issuer's discretion, so you could conceivably be left in the
lurch if someone makes off with your card.
"We believe prepaid cards should offer the same protections as
the traditional debit card tied to a bank account," says Michelle
Jun, senior attorney with Consumers Union. Efforts are currently
under way to convince the Consumer Financial Protection Bureau to
implement regulations, Jun adds.
Others have problems with the fees associated with prepaid
cards. Personal finance experts Ryan Mack, chief executive officer
of Optimum Capital Management, and John Ulzheimer, president of The
Ulzheimer Group, recently went on a media tour criticizing
celebrities such as Suze Orman and Russell Simmons for endorsing
prepaid cards because alternative payment methods such as debit
cards and credit cards may have fewer fees while helping consumers
to establish better credit, Mack says.
But the fees are necessary to cover transactions, customer
service and other fees associated with servicing the account, says
Brad Hanson, executive vice president of Meta Financial Group and
prepaid card issuer MetaBank. And with some of the new charges
being levied by banks, "it starts to look better for prepaid
cards," the Mercator Advisory Group's Jackson points out.
Despite the concerns, there is little chance that the prepaid
market will slow down or shrink any time soon. "There's enough
shellshock from the recession that people are going to be careful
with their money for some time," says Jackson. "Prepaid can help
with that."