Prepaid cards replacing bank accounts
Products first aimed at financially underserved are growing rapidly.
Chris Espinoza was having a hard time making purchases or paying bills online because he didn’t have a bank account.
“Nobody wanted to give me an account,” said Espinoza, now 31. The La Habra, Calif., resident explained that being financially reckless during his youth “messed me up.”
“Doing everything with cash was hard,” he said.
During a visit to Walmart about a year ago, Espinoza found his banking workaround in the Bluebird prepaid card. Offered by the megaretailer and American Express — it allows users to function as though they have a bank account, providing services through its mobile app such as direct deposit, online bill pay and check deposits.
Espinoza was not alone in his banking woes. According to the Federal Deposit Insurance Corp., more than a quarter of U.S. households either do not have traditional bank accounts or they do but use alternative financial services anyway.
Many people are turning to general-purpose reloadable prepaid cards, which function like debit cards, minus the checking account. The cards can be used to withdraw cash at ATMs and for purchases online and at retail cash registers. Sold at retailers, banks and online outlets, the cards are branded with a payment network logo, such as American Express or Visa, and can be used wherever that brand is accepted.
In some cases, these cards offer lower and fewer fees than basic checking accounts, according to a recent report by the Pew Charitable Trusts. But consumers can incur incremental fees for buying certain cards, loading them with money or even not using them.
Prepaid cards have enjoyed some of the biggest growth in servicing the so-called financially underserved in recent years.
Products aimed at that market generated $89 billion in fees and interest domestically in 2012, according to the Center for Financial Services Innovation. It found that general-purpose reloadable prepaid cards captured $1.6 billion in revenue that year, a 28.5 percent increase over 2011. Additionally, consumers loaded more than $64 billion onto these cards in 2012, according to the Mercator Advisory Group.
All that money has the U.S. Postal Service eyeing the prepaid card market. The cashstrapped agency released a report in January proposing its branches provide nonbank financial services including reloadable prepaid cards to its customers.
How did the underserved marketplace become so big?
“There are a number of forces at work,” said Christina Tetreault, staff attorney at Consumers Union, the policy and action division of Consumer Reports. She cited fallout from the financial crisis that tarnished some consumers’ credit to the point they no longer qualified for credit cards and bank accounts.
“Another piece is the innovation going on, and a lot of the products are more versatile than a traditional bank account,” Tetreault said.
“The underserved market is huge, and unfortunately poor people have had to spend a lot of money for banking-like services,” she added. “But now with increased competition, the cost to consumers is coming down.”