What Are Prepaid Debit Cards?
The cards have become popular with Millenials, the under-banked and un-banked, and those who seek an alternative to credit cards. In other words, they've proven to be a useful product for recession-weary Americans.
Because they offer the conveniences of credit/debit cards -- online shopping and bill pay, to name a couple -- but only allow consumers to spend money they've loaded onto the card, and they make for an ideal card for someone without a checking account.
But they also exist in an interesting regulatory space.
The CARD Act and the Dodd-Frank Act, both passed after 2008, both created new regulations on credit and debit cards.
The CARD Act made it more difficult for the 18-21 demographic to get a credit card, and the Dodd-Frank Act made certain debit cards less profitable for banks to issue because of the limits on interchange -- but prepaid cards are exempt from these caps.
This has created a regulatory environment practically designed for prepaid to thrive in.
And thrive it has. But not all prepaid cards are created equal. Some are loaded with outrageous, almost extortionate fees. Others are nearly indistinguishable from a checking account.
And like with all financial products, you need to be mindful of how you use your prepaid card. Even if you can't drive yourself into debt with one of them does not mean that there aren't unwise ways to use prepaid. There are plenty of ways to misstep.
Retail vs. Web vs. Bank
Prepaid cards are all over the place now. Every 7-Eleven has a rack full of them. Both Chase Bank and Lil Wayne endorse them. Cards sold by certain classes of issuer have some characteristics in common and certain advantages and disadvantages.
This is where prepaid had its humble beginnings: as gift cards, a quick and easy gift for someone you didn't want to shop for. And once these cards became reloadable, they haven't grown up much past the gift card level of sophistication.
Their main value proposition to the consumer is convenience. You don't want to go out of the way for your prepaid card: you can do it at Walmart. But with the convenience of this sort comes fees. Frequently these cards have monthly fees and start-up fees.
Furthermore, as Walmarts are not banks, you will need to pay fees for all ATM withdrawals -- they have no network of their own -- and also you'll pay fees to put money on the card. A double-whammy, if you will.
The market for web-based prepaid cards is vast and hard to pin down. These are not issued by big banks, and they aren't something you can pull off the rack -- the web is their de facto means of distribution, but they don't necessarily have any special Internet-enabled capabilities.
Some are fantastic, like the Mango Card, with low monthly fees that are even lower with direct deposit, plus an optional savings account.
Some are rip-offs, like the RushCard -- Russell Simmons' offering, loaded down by both fees and heavy branding.
Generally speaking, you’ll find lots of celebrity-sponsored cards online, and these are to be avoided at all costs. After all, why should you have to pay for their endorsement deal?
Not ones to be left out when there's a dollar to be made, banks have recently started rolling out prepaid cards of their own.
Chase, PNC Bank, and Regions have all recently released prepaid debit cards. Even American Express -- not a bank, but an established financial institution -- has a prepaid card, with no monthly fees.
Generally speaking, bank prepaid cards are reliably cheap, and they come with the added benefits of, well, a bank: ATMs, tellers, direct deposit, etc.
If you want to load money onto your account, you can do so at a bank. If you want to take money out, you have a free network of ATMs to access. In many ways, these resemble checking accounts in their fee structure and services offered -- just without the checks.