As consumers swipe debit cards for groceries, gasoline and other purchases, increasingly those transactions aren’t tied to a traditional checking account.
Prepaid debit cards are part of a growing niche of payment methods geared toward people who don’t have checking accounts, or folks who have them but still use the services of a check-cashing business.
Major names like Wal-Mart, JPMorgan Chase and Wells Fargo are among corporate giants that are selling their own prepaid debit card services, a segment of the payments industry that could account for nearly $100 billion in buying power in 2013.
“Prepaid cards are the new hot financial product,” said Odysseas Papadimitriou, CEO of credit card comparison website CardHub.com.
Payment processors like Atlanta’s Elavon and Global Payments stand to reap revenue from each card swipe. Others, like First Data and TSYS, make money not only off transactions but also for running the infrastructure for prepaid payment systems, said Steve Ledford, a partner with New York-based financial industry consultancy Novantas.
Reloadable prepaid cards in general — including store-branded gift cards and payroll cards — held $483 billion in 2011, double what was stored on the cards in 2007, according to Mercator Advisory Group.
Of that segment, prepaid debit cards, which generally have a Visa, MasterCard of American Express logo and include many of the features of a traditional bank account, held nearly $57 billion at the end of 2011, up from $12 billion in 2007.
Mercator projects prepaid debit will reach nearly $100 billion in stored value by the end of next year.
Twenty-nine percent of Americans have purchased a prepaid debit card for their own use, and 34 percent have bought one to give as a gift, according to polling this year by Synergistics Research.
Prepaid debit cards have been around for several years, led by companies such as Green Dot and NetSpend. But increasingly traditional banks, retailers like Wal-Mart, which partnered with American Express for a card called Bluebird, and even celebrities such as hip-hop icon Russell Simmons are pushing their way into the game. Chase introduced this year a card called Liquid, and Regions Bank rolled out Now Banking about a year ago.
For banks it’s a way to capitalize on sources of fee revenue curtailed by recent federal regulations, such as a cap on the fees larger banks can charge merchants to process traditional debit purchases.
It’s also a way for financial institutions to broaden their customer bases.
Liz Coyle, a spokeswoman with consumer rights group Georgia Watch, said prepaid debit cards carry benefits for consumers. For instance, they can provide conveniences of credit cards — such as online shopping — without relying on credit.
“For folks unbanked or underbanked, this can be a better solution than high-priced loans or traditional credit cards or even in carrying cash after pay day,” she said.
But consumers need to do their homework, Coyle said, by paying attention to transaction fees or fees that might be charged for instance, for replacing a lost card.
A September 2012 report by the Pew Charitable Trusts found the median fee to buy a prepaid debit card was $9.95, ATM fees were $2.25, and monthly fees averaged nearly $6. The median transaction fee was $1.
Pew found that prepaid cards carry risks to consumers because of confusing fee disclosures that make it difficult to compare products. Most have from seven to 15 different types of fees, Pew found, including ATM fees and monthly charges. Deposited funds also are often not insured by the FDIC.
Papadimitriou, with CardHub, said the cards have become popular with folks who have been turned down for a bank account, who can’t meet minimum balance requirements many banks have to offset monthly charges or who have run afoul of overdraft fees and sworn off banks.
The cards also have a following among immigrants who might not have a traditional tie to the banking industry, and people who work overnight hours or live in neighborhoods abandoned by banks to check cashers and payday lenders.
But the cards aren’t just popular with lower income consumers.
Ledford, the Novantas partner, said prepaid debit is growing in middle income America as an alternative to cash. Parents are using the cards for college-aged children or as a secure place to store ready cash or as a temporary payment card when taking trips.
“It’s still a fraction of what you see going through traditional debit cards and credit cards, but it is growing fast,” Ledford said.
The cards, Ledford said, also help offer spending control because consumers are limited to spending what’s on the card.
Source: MCT Information Services