banking

Why consumers flock to prepaid debit cards

How are consumers using prepaid debit cards -- as a replacement for a checking account or for some other purpose?

Based on the profiles of 160 million American households, the answer to this question depends on customer segmentation. According to (the) 2010 annual report of Green Dot, one of the largest prepaid card issuers, the usage of prepaid cards depends on the following four customer segments.

  • Never-banked consumers: Households in which no one has ever had a bank account. (They) use prepaid cards as a safe, controlled way to spend cash and as a means to access channels of trade, such as online purchases.
  • Previously banked: Households in which at least one member has previously had a bank account. (They) use prepaid cards as a convenient and affordable substitute for a traditional checking account by depositing payroll checks, pay(ing) bills, shop(ping) online, monitor(ing) spending and withdraw(ing) cash from ATM machines.
  • Underbanked: Households in which at least one member currently has a bank account but that also use nonbank financial service providers to conduct routine transactions like check cashing or bill payment. (They) use prepaid cards in ways similar to those of the never- and previously banked segments, but additionally as a credit card substitute.
  • Fully banked: Households that primarily rely on traditional financial services. (They) use prepaid cards as companion products.

Are prepaid debit cards a viable alternative to checking accounts?

Yes. The answer mainly depends on the monthly fee that a customer is paying in a traditional banking relationship versus how much the customer expects to pay using a prepaid debit card.

American Express has launched a new prepaid debit card that has no annual fee, no monthly fee, no customer service fee and no transaction fee. It is possible to direct deposit wages into a prepaid account.

What are the dangers of prepaid debit cards for consumers?

Consumers have to closely look at all the fee details. Though major prepaid debit card holders are transparent and publish this information, it is always a good idea to check the (Better Business Bureau) reports.

After initially purchasing (a) prepaid card at a retail store, the consumer has to activate the card by calling a phone number. If there are any issues in activation, the money can be stuck and unusable for a while.

Are there any advantages to prepaid cards over checking accounts?

Yes. The answer mainly depends on the monthly fee that a customer is paying in a traditional bank, and the network that the local bank provides. If a customer is banking at a large bank with a nationwide network and has a large deposit with the bank and pays no monthly fee, then the customer may be better off with the bank's checking account.

Conversely, if a customer is banking at a small bank with a small network of ATMs and high ATM fees or pays various monthly fees, then the customer may be better off with the prepaid card.

We would like to thank Rama Malladi, adjunct professor of finance at the College of Business Administration and Public Policy at California State University, Dominguez Hills in Carson, Calif., for his insights. We would like to thank Steve Pounds, senior editor at Bankrate.com, for providing the questions.

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