Reexamining Prepaid Cards

The recent boost in prepaid card popularity somehow slipped under the radar of some consumers as well as industry experts alike. They are so popular, in fact, that some people prefer them over traditional checking accounts!

When the Federal Reserve bank noted that the prepaid card market was the fastest growing commercial financial sector between 2006 and 2009 nobody seemed to notice. Once they started capping debit card swipe fees, though, everyone started paying attention: debit card issuers (banks), of course, felt the $8.04 in lost revenue while consumers realized that they were, perhaps, paying a little more than necessary.

Credit CARD Act of 2009 is largely responsible for this, ensuring that credit card companies are responsible and fair in the fees that they charge to their customers. This was intended to help customers keep better track of their credit and their cash, saving them from some of the predatory practices exhibited by a handful of less-than-forgiving lenders.

Ironically, though, the banking industry was largely oblivious to how consumers have been responding. In fact it wasn’t until 11% of survey respondents reported use of prepaid cards that Pew Charitable Trusts lead researcher Susan Weinstock took notice. With this notice she, and the rest of the organization, began paying better attention to prepaid card products. What they found, however, is much more important than a simple consumer trend and a passing fad.

Indeed, the study (published as “Loaded With Uncertainty: Are Prepaid Cards A Smart Alternative To Checking Accounts?”) found that the prepaid card market is still not quite on the radar of federal regulators. This makes it worthwhile to investigate the variety of prepaid products and compare them against your existing financial system.

For example, you might find that you could actually pay less in fees by using a prepaid card than you would for maintaining a checking account. Weinstock says

if you’re going to overdraft a lot, a prepaid card may be a better option for you as a consumer given that you’ll pay a lot less in fees. If you never overdraft, if you’re very careful about using free ATMs, if you’re as we call it a ‘savvy customer’ about watching to make sure that you pay as few fees as possible, then you’ll probably be better off just having a checking account.

That’s a lot to take in, but definitely worthy of consideration. Another example shows that a prepaid card could simply cost you less in monthly fees than a checking account, especially if your bank recently decided to raise the monthly maintenance rate. To save money you might be in the market for a card that offers free online bill pay and free direct deposit and you will likely find that many prepaid cards offer these services and a majority of these will be available at better rates than a debit card account.

On the other hand you should note that prepaid accounts are not necessarily FDIC insured, and if they are, the regulations are not the same as they are for checking accounts. This means that if you lose your card or your wallet is stolen you could lose whatever holdings you may have had.

Combined with the fact that the prepaid card market is expected to post $200 billion in assets by 2013 it makes sense why Pew has filed for the Consumer Financial Protection Bureau to intervene and regulate the industry. How they will operate to accomplish this is still up in the air but, for the most part they are on watch. Weinstock concludes:

The CFPB has opened this Advanced Notice of Prepared Rulemaking; so, they are paying attention, and they are looking at these issues.

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