Photo: Flickr Clemson
We wrote last week about American Express’ new prepaid debit card, which is being billed as a low-fee, easy-to-understand alternative to the cluttered (and frankly shady) prepaid debit market.We agreed, to an extent: most prepaid cards charge for everything under the sun, including withdrawals, purchases, and balance inquiries.
We even compared it favourably to some checking accounts. But then we found a dealbreaker in the terms.
Outside of ATM fees, the American Express card has only one fee to worry about, and that fee renders the card essentially irrelevant: the cost of reloading with cash.
If you want to reload through an AmEx credit card or through a checking account, there’s no charge. Otherwise, though, you need to buy a MoneyPak from Green Dot, which costs $4.95.
This little caveat is what kills the AmEx prepaid debit card, since no one with an AmEx credit card or a checking account has any use for a prepaid debit card.
The card for the unbanked requires a checking account
The primary reason to get a prepaid debit card is to avoid having a checking account to begin with, whether because you can’t make the minimum balance requirements to avoid paying fees, or because you simply don’t want to keep your cash with a bank. In fact, prepaid debit is marketed as a “safe” alternative to credit and cash; there’s no possibility of overdrawing or going into debt, and it’s less cumbersome than bills and coins. But if you need a checking account to reload your prepaid card, then you already have a debit card that isn’t charging you to reload it.
This reveals the biggest hole in AmEx’s prepaid strategy – their cards don’t have access to direct deposit. Most prepaid debit cards allow you to get your paychecks deposited onto the cards at no charge. By using direct deposit, you can avoid having to pay any reloading fees, and you can avoid having to pay more fees to get cash from shady check-cashing locations. But American Express doesn’t offer this crucial feature yet.
If the AmEx card is supposed to be a “fee-free” alternative for the unbanked, it falls short of its goal. Anyone with a bank credit card or checking account – who can reload the AmEx prepaid for free – has no need for a prepaid card. And anyone who doesn’t will have to pay Green Dot $4.95 every time they reload the card. If you get paid bi-monthly, that’s $9.90 each month out of pocket already.
First among prepaids no more
Unfortunately, we’ll have to revise our estimation of the AmEx prepaid debit cards. An American Express spokeswoman told us that AmEx is working on setting up a direct deposit system, which would allow users to reload for free, but for the moment, the only way to avoid opening a checking account is to pay Green Dot $4.95 per reload.
Here’s a hypothetical breakdown of the cost of the AmEx prepaid card, the Capital One Prepaid MasterCard, the popular Walmart MoneyCard, and the RushCard, which is currently under investigation by Florida’s attorney general. We assume that the user withdraws money from an ATM twice a month; loads the card with $200 twice a month via direct deposit, for a total of $400; and avoids all other fees.
ATM Fees (2x)
Reloading Fees (2x)
Cost per Month
*There is $4.95 monthly fee incurred for loading less than $500 a month.
In comparison, the AmEx prepaid doesn’t stack up at all well. What’s more, the card can only be used where American Express is accepted. That’s only about 4.5 million merchants, compared to 7 million for Discover and 8 million for Visa and MasterCard.
Checking still reigns supreme
As much as we’d like to say that AmEx is a solution for the unbanked, the nearly $5 reloading charge just reinforces our belief that regular checking accounts are generally preferable to prepaid. Our favourite checking account comes from PerkStreet Financial, an online-only bank that refunds all ATM fees and gives 2% rewards on all purchases if your balance is over $5,000 (1% otherwise). There are no monthly fees, and no minimum balance requirements, so even those who don’t have high balances will receive free checking.
This post originally appeared on the NerdWallet blog.