They’re not credit cards. They’re not debit cards. They’re a lot like gift cards – but not really. So where do they fit? These handy, reloadable cards function like a debit card, but are not linked to a bank account. Like a retailer’s gift card, the funds are loaded onto the card itself, but unlike these cards, the money can be spent anywhere a Visa, MasterCard, and other debit/credit cards can.
Filling a growing need
As more purchases are made electronically, there’s a growing need for people without credit cards and bank accounts to enjoy the same benefits as those that do. These days, prepaid cards are used for everything from managing budgets (as a way to restrict spending), to distributing government funds (like receiving tax returns, Social Security and unemployment benefits), to payroll distribution and generally as an alternative to checks, credit, cash, and traditional bank accounts.
In 2013, the FDIC estimated that 17 million adults (8% of American households) were without a checking or savings account. Prepaid cards provide the “unbanked” (and those with poor credit) a means to save money electronically, transfer and receive funds, access ATMs, and enjoy many of the conveniences that credit and debit cards provide.
Visa and American Express launched some of the first prepaid cards in the early 2000s as a way to help parents put aside and track funds for their teenage children to spend. Since then, the use of prepaid cards has grown significantly with the amount of money loaded on them tripling from 2008 to 2012 to $76.7 billion (according to a new report from Cardhub). Today, there are a myriad of prepaid card issuers—including financial institutions, and non-bank heavy-hitters like Wal-Mart and Google. The uses for prepaid cards continue to expand as a widening array of consumers discover new ways to benefit from this type of financial vehicle.
So what’s the catch?
For one thing, the fees on prepaid cards can be high, especially compared to regular checking accounts. Users can be charged a fee for the card itself, then again to load funds, and again to withdraw funds. In addition, since prepaid cards aren’t tied to another financial account, they won’t help you build a credit history the way a credit card will. And unlike credit cards, most prepaid cards fall short when it comes to offering benefits like air miles and protection against things like fraud.
The future of prepaid cards
The fee structure is still a hot topic, and as of right now, fees vary significantly amongst issuers. It also remains to be seen whether prepaid cardholders will be able to graduate to other financial products the way bank customers can. And while bank accounts have clear rules on things like overdrafts, these and other standards are still unclear for prepaid cards.
Overall, the full potential of prepaid cards as a financial vehicle is just now coming into focus. Despite the uncertainties, one thing seems very clear. As the move to electronic payments grows along with the number of unbanked households, prepaid cards appear to fill an important need in the expanding and rapidly evolving world of payments.