I thought it was time to learn more about prepaid debit cards and understand why they are one of the fastest growing financial products.  Here goes:

• The elevator pitch:  “With all of the functionality of a debit card, but prohibiting consumers from spending more than they load on the card, this product provides a convenient financial service with significant benefits and control.”  (Huffington Post, TD Bank SVP)

• Product description:  “General purpose reloadable” prepaid cards allow consumers to pay to reload the card and reuse it, and often allow consumers to take money out at ATMs. Many consumers use reloadable prepaid cards as an alternative to a traditional checking account (CFPB press release).”

• Trends:  “The landscape has become much more consumer friendly,” said Greg McBride, senior financial analyst at Bankrate.com. “There are a number of low-fee card options that have come into the marketplace, much more transparent fee structures. Many cards have just one, flat monthly fee, which is much better than the prepaid cards from years past.”
• Be sure to shop around:  A Bankrate study of 30 prepaid debit card providers in 2014 found a wide variation in fees:
  • Monthly maintenance fee:  $0 – $9.95/month
  • Card activation fee:  $0 – $9.95
  • ATM withdrawal fee (from Issuer’s ATM):  $0 – $2.50 per transaction

• Growing market driven by young people, according to data from Packaged Facts:  “Packaged Facts estimated that prepaid card transaction value will hit $274 billion by the end of 2014, an 11% increase from the 2013 prepaid card transaction value…The Prepaid and Gift Cards in the U.S., 4th Edition report also revealed that young adults within the age range of 18 to 34 have an average of 2.3 prepaid cards in their wallets, making them the key drivers behind the prepaid card revenue surge. These young adults also spend more than the average per month and their transaction volume is higher than average, the report showed.”

• Watch out for the fees (as with all financial products):  “Yet all prepaid cards are not made equally, some come with all sorts of fees — charges to load money, activate the card, speak to customer service or check the balance at an ATM — that could eat into the cash on the card (HuffPost article).”

• Federal regulation trying to catch up to this product:  “…there are no federal laws or regulations that directly protect consumers from hidden fees, liability for unauthorized transactions, or loss of funds in the event of an issuing institution’s failure. Nor are there federal rules requiring these cards to provide disclosures of fees, terms, conditions, or dispute resolution practices (Pew Charitable Trust).”
  • Change is coming in this area as CFPB indicated in this August 2014 press release:  “In the coming months, the Bureau plans to issue a proposed rule aimed at increasing federal consumer protections for general purpose reloadable prepaid cards.

• Use cases:
  • “On the other hand, a prepaid card can be advantageous in instances where the child has the tendency to overdraw a checking account or run up credit card debt (Washington Post)
  • “For consumers who have trouble establishing or improving credit (Bankrate)”
  • “Alternative to checking account (CFPB)”

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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