Who’s Ready for a New Breed of Prepaid Debit Card?

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If I asked you how direct deposit works, you’d probably say something along the lines of: “It’s when your employer pays you by depositing your pay check directly into your bank account.”  Whatever the exact wording is, you’re likely to mention a “bank account” or “checking account” somewhere along the line.  While all of that is currently true and to be expected, you answer might be quite a bit different in just a couple of months. If I asked you how direct deposit works, you’d probably say something along the lines of: “It’s when your employer pays you by depositing your pay check directly into your bank account.”  Whatever the exact wording is, you’re likely to mention a “bank account” or “checking account” somewhere along the line.  While all of that is currently true and to be expected, you answer might be quite a bit different in just a couple of months.

Debit Card Fee Cap Impact

The Federal Reserve-mandated cap on debit card interchange fees, which Card Hub forecasts will cost major banks over $9 billion annually, is due to take effect October 1 and banks are already compensating.  The likes of Wells Fargo, Chase and SunTrust have already announced plans to eliminate debit card rewards and are experimenting with fees for debit card use.  Similar yet more pervasive changes are also expected as October 1 approaches, resulting in an increasingly unattractive debit card market and thus a declining checking account market as well. 

Faced with higher fees, consumers will understandably be looking for an alternative to their traditional checking accounts and a new breed of prepaid cards will be waiting, ready to fill the void.

New Breed?

The prepaid cards that we’re starting to see nowadays aren’t your father’s prepaid cards, so to speak.  No longer are they the sole domain of consumers who cannot qualify for checking accounts and young people just learning what it means to responsibly manage money.  No, prepaid cards in the post-Durbin Amendment era won’t just be something that some people are forced to get due to a lack of options, but will instead be an attractive option that many consumers seek out due to low fee structures and lucrative rewards.

This makes a lot of sense, after all.  For certain segments of consumers, banks can make higher revenues off prepaid cards than checking accounts and can therefore afford to offer them at a lower cost and enhance them with rewards.

From a consumer perspective, it makes sense to gravitate toward the cheapest available option, especially when prepaid cards and checking accounts do essentially the same things.  Both prepaid cards and checking accounts make the following standard transactions possible:  direct deposit, online bill pay, inter-account transferring of funds, in-store purchases and ATM use.  The only difference:  you can’t write checks with prepaid cards. 

Prepaid Card Trends

Consumers have already shown a willingness to use prepaid cards, as evidenced by the fact that the number of prepaid card transactions rose 21.5% annually between 2006 and 2009 according to the Fed, making prepaid cards the fastest growing electronic method of payment during that time. 

What’s more, a prepaid card can already serve as a free checking account.  Card Hub’s Prepaid Cards Report – 2011 analyzed the cost of using five of the most well-known prepaid card issuer’s products for a consumer who has his paycheck directly deposited each month and uses an ATM once a week.  And while three of the cards examined would cost between $15 and $25 per month in this scenario, the GreenDot Prepaid Card was free to use under these conditions making it essentially a free checking account.

Final Thoughts

This phenomenon isn’t likely to be a flash in the pan either.  Debit cards and paper checks are essentially becoming less and less relevant before our eyes as legislation and technology progress.  And, given that prepaid cards allow you to do the exact same things as a checking account–except, of course, write paper checks–and are now more profitable, banks will make sure you have incentive to make the switch.  With that being said, I’ll check back in a few months and see whether terms like “checking account” and “bank account” still pepper your definition of direct deposit.

Odysseas Papadimitriou is the CEO and founder of Card Hub, a leading marketplace for online credit card applications.

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  1. ChuckG

    3 years ago

    My hubby was once a banker and checks once was the way of life. Now it’s the debit card, prepaid cards and credit cards. You go to the grocery store, where check-writing was the norm, now it’s all debit card. Checks will become obsolete. What surprised me on the prepaid cards was how AX got in on the action. Never thought they would have a prepaid card.

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  2. ebbeszoo

    3 years ago

    prepaid cards seem to be the way to go, i’m wondering if i should change my depoiste to them, however fear the fees associated with them. but when i turn around, there seem to be more and more fees now with banks too…. it seems like a lose/lose situation…. at least with prepaid i cant be drafted overdraft and returned fees!

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  3. champ76

    3 years ago

    There are fees now these days almost everywhere when you use your debit card. A lot has changed in the past few months with hidden fees.

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  4. lotsoflove

    3 years ago

    my bank charged me $4 a month for an account, with the prepaid card nothing, i made my paycheck go to my prepaid card and most doesnt charge fees for transitions, mine doesnt but you do need to check the fine print. also you need to be careful where you can take money out, thats another thing to be careful of with the prepaid card. atms will charge you if your not careful.

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  5. ibankup

    3 years ago

    Actually, some prepaid cards do now allow people to write paper checks.
    This is the case of the UPside Visa prepaid card which allows cardholders to issue paper checks by simply filling out a form on their PC and even on their cellphone.

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  6. phil_young

    3 years ago

    What you are missing is that the death of checks is being caused by the death of jobs. No jobs, no payroll checks (and soon- no credit). Unless prepaid creates 7-10 million jobs there will still be a problem.

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