Rising bank fees have chased millions of people away from banks and into prepaid debit cards. In just a few years, prepaid cards have become the fastest growing payment method in the U.S. Even American Express has started to offer a prepaid card. But the cards do have many associated problems: complex fee schedules, few of the consumer protections afforded to bank and credit card customers, and there is no ability to build a credit history.
People are using prepaid cards as checking accounts. Prepaid cards have gone mainstream by catering to the ranks of the unbanked – people who don’t have a bank account which is one in every five Americans! Prepaid cards can be used to pay bills or buy merchandise in the same places a bank issued debit card can be issued. The IRS has issued tax refunds on prepaid cards to about 600,000 bank account free households. Social Security payments for the unbanked have been loaded onto prepaid cards since 2008. Most new prepaid card customers are seeking refuge from new and escalating fees such as $3 to print an account summary, $12 a month for checking accounts with a balance below $1,500, and overdraft fees of $35 that most banks charge. Even the smallest fee can upend the world of people who are functioning on a break-even basis.
Card issuers make money in two ways: they charge fees to consumers to activate, reload and maintain the cards and merchants pay a fee every time a card is swiped to make a purchase. Customers typically pay $3 to $10 each time they load the card with cash and monthly maintenance fees average about $5.00. ATM withdrawals can cost $2.50 per transaction. However, it is necessary to point out that each card provider has a different fee structure.
Prepaid cards do have some drawbacks as mentioned above. Their use isn’t reported to major credit bureaus so they don’t help build a user’s credit history or credit score. Funds added to a card are FDIC insured but the cards aren’t protected by the federal laws that limit credit card customer’s losses to a $50.00 fee for fraudulent use. Again, the amount of the potential loss is regulated by the card provider.
The largest of the prepaid card providers is a firm called Green Dot. Green Dot has more than 4.3 million cards in circulation. This is a 230% increase from three years ago. Between January and March of this year, $4.6 billion dollars was loaded onto the company’s cards. Prepaid cards may become another thorn in the side of the banking industry but banks are forcing many people to look to other options as they go “fee crazy” in an effort to generate additional revenue. Sort of like the airline industry with baggage fees.