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Prepaid debit cards gather steam

By Claes Bell, CFA · Bankrate.com
Tuesday, January 10, 2012
Posted: 4 pm ET

Looks like personal finance celebrity Suze Orman will be joining Russell Simmons, the cast of Twilight and Lil Wayne in introducing a branded prepaid debit card.

Orman's Approved Card is much like the other entrants in the market, providing the ability to make debit card transactions without a conventional checking account, and charging a la carte fees for various debit card services such as making ATM withdrawals. To set itself apart from the rest of the prepaid field, it features competitive fees and comes with some additional services thrown in from companies Orman has represented in the past, including TransUnion and TrustedID.

There's no doubt reloadable prepaid debit cards are on the rise. According to a Federal Reserve study highlighted in a 2011 TowerGroup report, the volume of prepaid card transactions grew from 3.3 billion in 2006 to 6 billion in 2009, and TowerGroup predicted in a 2010 report that the prepaid card market would grow more than 22 percent a year through 2013.

That's not necessarily a bad thing. It's true I've been critical of the cards over their fee structures, but I don't want give the impression that I think there's something fundamentally wrong with the idea of a prepaid debit card.

In many ways, they're a fine substitute for cash; their balances are FDIC-insured, many of them support bill payments that used to have to be made with money orders, and workers can set up direct deposit into the cards that help them avoid checking-cashing places.

My issue with prepaid cards is the way they're sometimes marketed: as a cheaper alternative to checking accounts that's friendlier to the little guy than the mean old banks. I got on RushCard's case about this a few weeks ago, specifically regarding what I consider high fees and its RushGoals savings program, which gives discounts on fees instead of interest on customer balances. I'll have an interview with RushCard CEO Rob Rosenblatt tomorrow in which he addresses some of those concerns and argues that, for a certain kind of customer, his product is a good alternative to checking.

What do you think? Are prepaid debit cards a good substitute for a checking account?

Follow me on Twitter: @ClaesBell

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