What’s Behind the Rise of Prepaid Cards?
Prepaid debit cards have seemingly burst onto the scene in recent years, and while much of the attention paid them has been a result of the rash of new celebrity endorsers and the unintended consequences of the contentious Durbin Amendment, deeper psychological factors are also in play, according to the findings of a focus group conducted by The Pew Charitable Trusts Health Group.
To provide a bit of context, prepaid debit card usage rose more than 20% from 2006 to 2009, according to Federal Reserve data, which made prepaid cards the fastest growing electronic payment method over that time period. Their rise has since accelerated even more, though. According to the research firm the Mercator Advisory Group, United States consumers loaded $28.6 billion onto prepaid cards in 2009, and this number is expected to reach a whopping $201.9 billion by 2013. That’s a growth rate of roughly 606% in just four years, and even if this prediction doesn’t pan out, it’s clear that prepaid cards are in the midst of a stratospheric rise.
Among the driving forces behind this rapid ascent, according to Pew findings, is the desire of consumers to avoid hidden fees associated with everyday banking as well as the overleveraging that has become an unfortunate staple of American consumerism since before the Great Recession.
“Most participants in the focus groups have a checking account,” the Pew Health Group found. “Of these, many have previously incurred unanticipated fees on their account and are not happy about such an outcome. They prefer the $2 and $3 fees from prepaid cards over the potential of a $35 overdraft fee on their checking accounts.”
The interesting thing about this particular finding is the fact that not only do cumulative prepaid card fees have the potential to quickly add up to more than the $35 traditional banking customers have found to be so perturbing, but consumers now also have the choice to opt of out the ability to overdraw their checking accounts and thereby avoid overdraft fees altogether. Indeed, a study conducted by the consumer interest group Defend Your Dollars concluded that there are more types of fees associated with prepaid cards than checking accounts, and checking account fees are actually easier to avoid. It therefore appears that consumers either value transparency over savings or assume prepaid cards to be cheaper than checking accounts due to the fact that each fee charged tends to be relatively small.
This dynamic is made ever more intriguing by the fact that participants in the Pew Health Group’s focus group recognize and object to the multitude of different fees that prepaid card issuers charge.
“While participants in the focus groups do not complain about the dollar amounts of the fees,” Pew found, “they are concerned about the fees associated with every aspect of the cards: an initial fee to purchase, subsequent fees for reloading funds, monthly fees, a replacement fee for lost cards, a fee to use ATMs, and a fee to call customer service. Participants are unhappy with both the number of fees and their cost.”
Despite these fees, prepaid card users find that they make spend easier to control.
“[The card] is $9.95 per month for unlimited charges on it or a dollar per charge on the card,” said one female participant in the Pew focus group. “I know exactly how much I’m going to have to pay in fees upfront. I know exactly how much money is available on the card because I put it on the card. … It’s just easier to track and manage.”
A number of misconceptions are also behind the rise of prepaid cards. According to Pew’s findings, many consumers not only believe prepaid cards to provide superior fraud and identity theft protection than credit cards and debit cards, but most also assume that the prepaid card industry has government oversight and that all prepaid cards have FDIC insurance for loaded funds. Needless to say, they are quite concerned upon learning that this is not the case.
While hard truths such as these could serve to put a damper on the popularity of prepaid cards, increased recognition of the value of comparison shopping could very well counteract that. Most focus group participants said that they simply opened whichever prepaid card was most convenient or recommended to them. However, the right prepaid card for a given consumer largely depends on his or her spending habits, use of direct deposit, and ATM accessibility, as these things are the primary cost drivers.
Choosing the wrong prepaid card can be a very costly mistake, as the difference in cost between the best and worst cards can be nearly $300 per year, according to WalletHub’s Prepaid Card Report. People will ultimately learn that this is the case, though, as the prepaid card industry seems to be just getting started.
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