The Case for Reloadable Prepaid Cards in Today's Regulatory Environment

March 09, 2011 at 1:02 PM

How do consumers access safe and cost effective financial services in today’s environment of climbing banking fees? Based on recent research, consumers who choose a reloadable prepaid card to manage their finances could pay far less in fees than if they use low-balance checking accounts or check cashing for similar financial services. The study, published this week by my firmBretton Woods, found that consumers have many affordable options to manage their finances with reloadable prepaid cards and can pay fees as low as about $6 a month or $76.35 per year.

Regulation E, Dodd-Frank and the Durbin Amendment have all had or will have the effect of increasing costs and reducing revenue at banks, and it is reasonable to expect that these impacts will inevitably be passed along to the consumer.  We are already seeing a reduced availability of basic free or low-cost transaction accounts, and even fewer options for the unbanked and under-banked populations. 
 
The four major banks, Bank of America, JP Morgan Chase, Citigroup and Wells Fargo, account for 32% of the deposit market in the United States. To the detriment of consumers, all of these banks have eliminated totally free checking and now require customers to maintain higher average balances, have direct deposit, or bank exclusively electronically to avoid service charges on their regular checking accounts. Prominent banking executives forecast that changes their banks are forced to make in response to new regulation will make their checking products unpalatable for low balance customers. The CEO of JP Morgan Chase, Jamie Dimon, predicted his bank would lose 5% of their checking customers.
 
In the meantime, the network branded reloadable prepaid card market has become more competitive and thus providers have lowered fees. They have also developed more value-added services such as electronic bill payment, savings accounts and credit building features. Based on our research and comparison of product user costs, reloadable prepaid cards are a cost-competitive alternative to basic checking accounts, check cashing services or a cash-based lifestyle.
 
  • Reloadable prepaid card users’ costs range from $76 to $261.35 annually if they use direct deposit and $185.95 to $380.15 if they don’t take advantage of this feature.
  • Bank customers that incur overdrafts pay from $218 to $284 annually for a basic checking account
  • Consumers that utilize check cashers and cash pay $140 to more than $720 annually
 
We also found that the consumers of reloadable prepaid cards are savvy and understand how to limit the fees they pay monthly. Some techniques include having their pay direct deposited to their card, getting cash back when they make purchases with the card and using ATM’s or text alerts to notify them of the balance on the card to avoid other inquiry channels that charge fees or ATM decline fees.
 
Many early users of branded prepaid cards are otherwise unbanked, and this population is likely to face the most obstacles to mainstream banking under the new fee structures already emerging on basic checking accounts. Prepaid cards have an appeal for individuals outside of the un- or underbanked population; however, as a May 2010 study by Mercator Advisory Group found that nearly three-fourths of surveyed customers that had purchased a general-purpose reloadable prepaid card maintained a household checking account. Through better public education, prepaid issuers can ensure their product is a safe and cost-effective option for conducting basic financial transactions for all consumers.
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