Prepaid Cards Gaining Popularity, Despite Fees

Would you pay your bank $5 a month (or more?) just so you can withdraw money you have deposited there?

As absurd as that sounds, a growing number of consumers are doing a very similar thing for the privilege of using a prepaid debit card.

Large banks and the big names in the credit card industry have convinced consumers that paying a fee to deposit money on a piece of plastic that can then be used just like cash, is a good thing.

A new survey by TD Bank shows that consumers, especially millennials, are willing to absorb a laundry-list of fees in return for having a convenient, secure and anonymous source of purchasing power.

“Consumers have told us they are concerned with the safety of their money and personal information,” Tami Farrow, Head of Retail Deposit Payments at TD Bank, said in a press release. “Their habits with prepaid cards demonstrate they feel secure, especially when making day-to-day purchases or shopping online.”

Prepaid debit cards started out as a useful resource for the estimated 80 million “unbanked” Americans, meaning those who are either denied access to a bank account or voluntarily choose not to have one. With no checking account or credit card to back them, they would have to carry a wad of cash everywhere for expenditures.

Instead, they can use a prepaid debit card that would give them a record of all purchases. That is especially useful for online buying where cash is usually refused. Some of the other benefits for prepaid debit cards include:

• Security for online purchases. No worries about your name, credit card or bank account numbers being hacked because there is no identity associated with the prepaid debit card.
• Allows employer to direct deposit paychecks to prepaid debit card account.
• Access to ATM machines to make cash withdrawals, when necessary.
• Ability to make purchases anonymously.
• Makes budgeting easier, especially for college students and senior citizens. You can only spend the amount deposited on the card. When you’re out … you’re out!

For many years, however, those benefits were overshadowed by fees for virtually everything you did with the card. You were charged for activation, monthly maintenance, cash withdrawal , bill inquiry, customer service, bill payment and re-loading the account. There was even a charge called “dormancy” for not using the prepaid card enough.

The fee structure varies greatly between cards, but each one usually ranges from $1 to $5. The total monthly fees vary, often depending on the amount deposited on the card, but can reach $15-$20.

Many of those fees have been reduced or eliminated in the past year and it has helped grow the market for prepaid debit cards. The number of card users and the amount spent by them ($37 billion) has doubled in the last five years.

Many of the same names that dominate the credit card field – Visa, American Express, MasterCard – are prominent in the prepaid debit card field, alongside big banks like BB&T, Chase and US Bank.

Unfortunately, it is difficult to compare one card to another because there are no rules governing the industry. Each provider chooses which fees it will include and under what conditions it will waive fees. There also are few consumer protections if the card is lost or stolen.

The Consumer Financial Protection Bureau is looking at enacting regulations that help protect consumers in both of those areas.