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Prepaid Cards

A Growing Alternative for the Unbanked

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Prepaid Card Overview: Prepaid cards are a variation on the gift cards issued by many major retailers that can be used either at the cash register or online, because they have both a magnetic stripe and a serial number with PIN. Rather than being restricted to use at a single retailer or family of retail chains, prepaid cards are designed for general use at a wide variety of merchants. This makes them a close substitute either for carrying cash or for utilizing a more traditional credit, debit, ATM or bank check card. Those with the widest acceptance are issued by credit card giants Visa, MasterCard or American Express, and are accepted wherever the same companies' credit and debit cards are.

These general use prepaid cards are quickly evolving from an alternative to giving a gift by cash or check to a store of value for the unbanked. That is, people without traditional banking accounts are converting paychecks and benefit checks into balances on prepaid cards, rather than depositing them into bank accounts or turning them into wads of cash from check cashing services. This is being spurred by hikes in bank account fees, especially the disappearance of free checking. Similarly, some employers are given low-wage workers the option of having their pay loaded onto prepaid cards, and some government welfare agencies are doing the same with benefit payments. A lower-cost alternative to banks and traditional check cashers alike, Mango Financial, also has prepaid cards as a central offering (follow the same link regarding free checking).

Prepaid Card Statistics: The Nilson Report, a market research publication, finds that the 50 largest issuers of prepaid cards processed transactions amounting to $79.9 billion in 2011, nearly a 25% increase from $64.1 billion in the prior year. Moreover, the dollar value of transactions funded by prepaid cards is expanding at over twice the rate of that for credit and debit cards.

Another market research firm, Alte Group, conducted a survey of 500 consumers in the United States who use so-called alternative financial services (described in more detail under the link above to a discussion of the unbanked) in the first quarter of 2011. The breakout of prepaid card users by age group is:

  • 4% Senior Citizens
  • 29% Baby Boomers (born 1946 to 1964)
  • 24% Generation X (born circa 1965 to 1979)
  • 43% Generation Y (born circa 1980 to 2000)

By income:

  • 44% under $30,000
  • 23% from $30,000 to $44,999
  • 18% from 45,000 to $69,000
  • 15% over $70,000

By educational attainment:

  • 5% without a high school diploma
  • 25% with high school, vocational school or technical school diploma
  • 36% with some college but no diploma
  • 34% with a college diploma or higher education

Prepaid Card Providers: The major players in the world of prepaid cards include Green Dot Corporation and NetSpend Holdings Incorporated. Sales of prepaid cards typically are concentrated in drug stores, convenience stores and grocery stores. An alliance with Green Dot has been a major underpinning of Walmart's strategy to make itself a banking alternative through its network of Walmart MoneyCenters. More recently, Walmart also has partnered with American Express to develop an alternative prepaid card dubbed Bluebird.

Traditional banks such as JPMorgan Chase, however, recently began selling them in branches. They like the facts that fees on prepaid cards are not constrained by the Dodd-Frank bill, unlike debit and credit cards. (Also according to JPMorgan Chase, Dodd-Frank has rendered unprofitable 70% of clients with less than $100,000 on deposit.) Also, prepaid cards present no credit risk, since no credit is extended to the user.

A 2012 J.D. Power and Associates study found that the number of banking customers switching institutions has been climbing, from 8% to 10% in just two years. However, factors other dissatisfaction, such as a change in marital status or residence, appear to be more significant in driving this trend. Nonetheless, new entrants into the market for prepaid cards, such as Walmart and American Express, as well as many of the banks referenced above, are looking to tap this widespread unhappiness with the traditional banking system.

Fees: The fees on many prepaid cards easily can exceed $5 per month, with separate charges for activities such as calling customer service or performing balance inquiries at ATMs. As a result, various consumer organizations are pressing for controls on the fees associated with prepaid cards, some of which they assert are confusing and excessive.

Sources: "Prepaid Enters Mainstream: Venture Between Wal-Mart and American Express Illustrates Industry Shift," The Wall Street Journal, October 9, 2012. Also, "Walmart and Amex target the unbanked," Financial Times, October 9, 2012, and "Walmart/Amex" in The Lex Column of the same issue.

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