Nobody wants to pay money to spend money.That’s a bit redundant.
But with changes in financial law, spending money is becoming increasingly expensive.
The Durbin Amendment, a provision of the Dodd-Frank Bill of 2010 that caps debit card interchange fees at nearly half of their current value, will make debit cards significantly less profitable for issuers.
As a result, banks are cutting debit card rewards programs and even piloting debit card usage fees.
The Durbin Amendment, however, exempts prepaid debit cards, and some speculate that prepaid could be a short-term solution for a long-term issue.
Where did these things come from?
Prepaid debit cards have long been a resource for young adults and the un- or under-banked. Simply stated, you pre-load money onto a card and use it online or in person, just like a regular debit card.
These financial products have been on the rise for the past decade, a trend nurtured and accelerated by Steven Streit of Green Dot.
Streit originally intended the cards to be a tool for teenagers shopping online. But the people who actually bought the cards fell under another demographic entirely.
Adults unable or unwilling to use credit cards or checking accounts saw Streit’s cards as an accessible alternative.
Streit found financial backing from Sequoia Capital, a premier venture firm, and revamped his strategy as prepaid debit cards exploded into an industry all their own.
With 4.3 million cards outstanding, Green Dot leads the burgeoning market, its $117 million revenue in 2011’s first quarter up 26% from 2010.
The second-biggest player, NetSpend, lags far behind with 2.3 million cards outstanding and a second-quarter revenue of $74.4 million.
Until now, many people who have favoured prepaid debit cards have been those in poor financial standing with limited or no credit. But with the Durbin Amendment taking effect in October, prepaid debit cards may become a more popular choice across the board. Congress excluded prepaid debit from the new interchange rules, possibly because many government benefits are distributed via prepaid cards rather than checks. Banks may take advantage of the exemption and push prepaid cards as affordable substitutes for regular debit cards.
False hopes and misconceptions
Prepaid debit cards seem to offer an alluring alternative to debit cards and checking accounts, but they have been under attack lately (and for good reason). There are a few reasons why you might buy a prepaid debit card, but there are more reasons to avoid them.
One of the commonly listed advantages of prepaid cards is their use in budgeting. Users are able to avoid overdraft fees and determine spending limits by preloading their cards with a budgeted amount. This idea of limiting available funds is somewhat sensible, but really, there is nothing (aside from self-control) preventing you from adding more money to your card or spending money budgeted for food on something else entirely. What’s more, this argument applies to (usually lower-fee) debit cards as well.
Another benefit often associated with prepaid debit cards is their supposed ability to raise your credit from the ashes of previous financial misfortune. Unfortunately, prepaid cards do not heal bad credit. You’re using your preexisting funds, not borrowing money, so swiping your card does little to improve your financial standing. Even Russell Simmons, creator of the Rush Card, seems confused about this misconception, claiming his prepaid card is a solution for folks trying to rebuild credit.
Please, no more fees
The most frightening flaw with existing prepaid debit cards is the exorbitant variety and magnitude of fees. Often, the cards themselves cost money to obtain. Then you have monthly fees, annual fees, reloading fees, account maintenance fees, bill payment fees, ATM withdrawal fees, and balance inquiry fees. Though individually most of the fees are less than $3 apiece, they add up quickly if you plan on actually using your card.
If those fees aren’t enough for you, your card might have some hidden ones, too. Florida’s attorney general has issued subpoenas to five prepaid debit card companies and is investigating possible unfair practices relating to hidden fees and empty promises to rebuild credit. The companies under scrutiny include Sequoia’s darling, Green Dot, as well as its competitor Netspend. If found guilty, it would indeed be a saddening reminder that companies will go to great lengths to take a little more money away from those who have none.
For many, prepaid debit cards are a last resort. But there are alternatives, even for those with the most abysmal credit. If you’re looking to rehabilitate your credit score, consider the secured and unsecured credit cards from Orchard Bank or another HSBC credit card. Cards from this UK-based issuer offer the most accessible cards for people with bad credit. HSBC subsidiary Household Bank even offers a secured card with a 2% cash back rewards program, a solid rewards program that is hard to come by even with good credit.
Who knows what the future will hold for prepaid debit cards? Maybe people will get fed up with paying fee after fee after fee, and prepaid cards will fall by the wayside. Or maybe, in light of recent legislation, interchange-seeking banks will offer some really stellar deals and rewards programs to shift their customers toward prepaid and away from Durbin-afflicted debit. Whichever road the market takes, one thing is for certain: Prepaid debit cards have a long way to go.
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