A Better Alternative to Traditional Banking?

Prepaid debit cards, also known as reloadable debit cards, are the latest fad in consumer financial products.

Accepted everywhere traditional credit and debit cards are taken, prepaids offer access only to the amount of money originally loaded onto the card (so no overdraft fees), as well as a number of other benefits for anyone working within budget boundaries.

For consumers tired of the seemingly endless bank fees nibbling away at their hard-earned cash, these cards appear to be a great way to thumb your nose at the banking industry as a whole. Or so it would seem.

What Are Prepaid Debit Cards?

Prepaid debit cards have traditionally catered to the unbanked and under-banked consumers, terms used to describe low-wage earners with bad credit or those with few banking options in lower-income neighborhoods. These consumers are more likely to use check cashing services, payday loans or non-bank money orders for their financial transactions, rather than a traditional checking or savings account.

To date, the largest providers of prepaid cards to these markets have been companies like Green Dot Corporation and NetSpend Holdings, Inc., which sell them in grocery stores, convenience stores and check-cashing outlets.

Established banks and credit unions are now seeking to cash in on the trend by carving out their own market share. Currently, Capital One (NYSE: COF), Wells Fargo (NYSE: WFC), U.S. Bank (NYSE: USB), Bank of America (NYSE: BAC) and PNC Bank (NYSE: PNC) are among those financial institutions either considering or already testing the pre-paid debit card waters. Potential customers include:

  • Adults seeking to curb impulse spending.
  • Students under the age of 21 who do not have a credit card.
  • Parents wanting to teach their children money management skills.
  • The unbanked and or under-banked consumers who make up over 25% of all U.S. households.
  • Online shoppers wanting to limit the risk of debit or credit card fraud.
  • Tourists wanting a pre-paid currency card without the hassle of expensive exchange fees.

How Prepaid Debit Cards Work

The simplest way to obtain a prepaid debit card is through a retail store displaying the Green Dot, SmartyPig, RushCard or other prepaid company’s logo. Customers can purchase the card pre-loaded with a variety of dollar amounts, similar to buying a gift card. Activating the card is as easy as a phone call or a visit to the company’s website. Reloading is possible by either returning to a supported retailer, or by enabling bank account transfers or signing up for direct deposit through your work place.
#-ad_banner_2-#Alternately, consumers can purchase cards online. The application process asks for the customer’s name, address and date of birth. Applicants must be 18 or older, though teenagers between the ages of 13 and 16 can apply with parental consent.

Once the issuer approves the application, the cardholder will receive the card in approximately 7-10 business days after applying. The card must be activated before it can be loaded with cash. This is done either by directly calling the company or by going online. After card activation is complete, the user can then choose a cash-loading option.

For those preferring the ease of electronic transfers, prepaid cards typically come with an account and ACH routing number for bank account cash transfers. If the card has a Green Dot MoneyPak or Visa ReadyLink logo on the back, it can also be reloaded either online or at any retailer site displaying these logos.

Acquiring a card is perhaps the easiest part of the process. Like any good deal, though, there’s also a catch.

Cautions and Caveats

Prepaid debit cards are also equal opportunity fee chargers to both merchants and users.

Since these cards are exempt from the financial overhaul bill for interchange fee reform, the advantages of prepaids for financial institutions are two-fold: The issuing-banks increase the number of customers from previously overlooked markets, while potentially counterbalancing their debit-card fee losses expected from the upcoming debit card reform.

[For more on interchange fees, visit our InvestingAnswers Feature: Credit or Debit? Your Choice Could Cost You 3%.]

And with little regulation to limit the number of hidden fees associated with prepaid debit cards, there is no limit to the number of charges that can quickly reduce an unsuspecting card user’s cash balance. These charges can include:

  • Activation fees ranging from $3.00 to $39.95.
  • Monthly fees ranging from $2.95 per month to $9.95 per month.
  • Cash withdrawal fees ranging from $0.99 to $2.50 for each withdrawal.
  • Balance inquiry fees ranging from $0.45 to $1.00, not including any additional fee charged by the ATM owner.
  • Paper statement fees ranging from $1.00 to $5.95.
  • Customer service fees ranging from $1.00 to $3.95.
  • Inactivity fees ranging from $1.95 to $9.95 per month.

Prepaid Fees

The sheer number of fees on these cards can be a high a price to pay, regardless of their ease-of-use benefits. Annual costs can range from a high of almost $190.00 to a low of $53.00.

Consumers should also note that while some prepaid debit cards might charge fewer fees than others, it still might be worthwhile to research traditional checking accounts before taking the prepaid debit card plunge. Sometimes the no-frills, non-overdraft checking account with a debit card will still be cheaper than prepaid debit cards.

For those who have no choice but to continue on the prepaid path until they can repair their credit, or for those interested in these cards for budgeting or travel purposes, here’s a list of several prepaid debit cards and their associated fees:

In the end, the increased use and popularity of prepaid debit cards means more issuers will enter into the market. And with an increase in competition, consumers can expect better deals as fees are drastically reduced to attract customers. Gone are the days of $99 activation fees, but if you’re considering the route of prepaid debit cards, a little research will go a long way to ensure your account balance isn’t being diminished by excessive fees.

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