General purpose reloadable prepaid cards are rapidly growing in popularity. Consumers are using prepaid cards in lieu of checking accounts for everyday purchases, withdrawing money from ATMs and paying bills.
Even if you don’t plan on offering prepaid products at your financial institution, you need to pay attention to this market, because prepaid cards can compete directly for your checking deposit dollars, and it’s only going to get bigger. Much, much bigger. In 2009, consumers loaded $28.6 billion onto prepaid cards. By next year, that figure is forecast to explode past $200 billion, an increase of over 600%.
The Pew Charitable Trusts released a meaty study that takes a deep look at reloadable prepaid cards. The report, “Loaded With Uncertainty: Are Prepaid Cards a Smart Alternative to Checking Accounts?”, analyzed the account agreements, fee schedules and web pages for 52 different prepaid cards. Pew claims that this sample size represents at least 75% of the total U.S. market. The report offers financial marketers a host of insights that both banks and credit unions on either side of the prepaid game can use as competitive leverage.
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Attack Those Crazy Prepaid Fees
The prepaid market exhibits a range of fee structures for various services offered, with most cards having between 7 and 15 discrete fees. The range for the median cost of the common fees Pew tracked, such as monthly and ATM fees, was $0.50 to $9.95.
The median cost for most service charges on the 52 prepaid cards Pew studied was less than $3. Prepaid cards also offer some services for free. However, it is unclear between cards which services are offered for free and which have fees but the fees are not disclosed. For example, 21% of the cards Pew studied disclosed that live customer service calls were free, while an equal percentage did not disclose any information about this fee.
Half the cards analyzed afforded consumers one or more ways to avoid a monthly maintenance fee. Fifteen cards (29%) either did not have a monthly fee or charged it only if customers do not use their cards for a number of days, ranging from 60 to 395. Eleven cards (21%) waived their monthly fees for customers who load a minimum amount onto their cards each month. For these cards, the median minimum load requirement to waive the monthly fee was $1,000, and the range was $100 to $2,500.
To avoid ATM fees, consumers can opt for “cash back” when making a point-of-sale PIN purchase. Likewise, consumers can steer clear of extra fees by viewing accounts online. Of the cards Pew studied, obtaining a paper statement from all but four cards would incur a fee.
Pew found that, while they are not required to carry FDIC insurance, more than 90% of prepaid cards disclosed that their cardholders’ funds were in fact FDIC-insured.
Pew says the unregulated nature of the prepaid industry spells bad news for consumers. For instance, prepaid cardholders can be automatically enrolled without their knowledge into “overdraft coverage” — essentially turning a prepaid debit card into a full-fledged credit card. Only five of the 52 cards studied disclosed the availability of overdraft plans and fees. Imagine how surprised and irritated prepaid customers are when they get surprised by credit charges, especially since the whole point of prepaid is so cardholders can “live within their means.”
Checking Accounts vs. Prepaid Cards
Checking accounts and prepaid cards serve similar purposes in many ways but offer services through different business models and fee structures.29 Unlike the standardized checking account market, prepaid cards vary greatly in terms of services and fees. In addition, federal laws and regulations concerning supervision and consumer protections do not uniformly cover checking accounts and prepaid cards.
Prepaid card users are often charged fees for many services, but the cards generally do not have overdraft plans and their accompanying fees. In addition, prepaid cards usually do not require a credit or background check. Accordingly, consumers who are in ChexSystems or who have had other problems with a checking account are able to purchase
a prepaid card.
Pew found that prepaid cards frequently charged fees for common services. These fees included charges for point- of-sale transactions, in-network ATM withdrawals, and customer service calls. Most bank accounts did not charge these fees. However, in Pew’s study there were a few areas where prepaid cards were equal to or better than checking accounts:
- Fees for out-of-network ATMs were similar for both product types.
- The median monthly fee for prepaid cards was about half of what it was for checking accounts.
- Overdraft fees, which were ubiquitous with checking accounts, were uncommon with prepaid cards.
Pew says that prepaid cards may make sense for some consumers who frequently incur high bank overdraft fees, but otherwise Pew feels prepaid cards are a risky, largely unregulated option inferior to the traditional checking account.
For those financial institutions diving into the prepaid market, a compelling competitive position could be carved by taking a simplified, transparent approach to fees.
For those banks and credit unions with no plans to offer prepaid products, they can educate consumers about the risks and fees vs. the advantages of a regular checking account. Stress that prepaid is risky because it’s unregulated and potentially expensive because of the fees.
Why People Like Prepaid Cards
In a previous study, Pew found that consumers are attracted to prepaid cards because they facilitate the compartmentalization of funds and allow users to limit their spending to the amount on their cards, thereby avoiding unwanted debt. Consumers likewise explained that they purchased prepaid cards because they were unhappy with bank overdraft penalty fees. They preferred the up-front $2 to $3 fees from prepaid cards over a possible $35 overdraft penalty fee from their checking account.
Consumers also fear the “Big Brother” aspects of modern financial institutions, saying they prefer the perceived anonymity of prepaid. Some believe the cards are a better safeguard against identity theft and fraud, and offer better privacy protection than conventional debit/credit cards. Other consumers choose prepaid cards for particular bills (such as utilities) for which they did not want to give the company information about their checking accounts.