Pre-Paid Debit Cards: A Changing Landscape
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Prepaid debit cards, often sold in drug stores and can be reloaded with cash, are usually marketed to low-income consumers who don't have credit cards or checking accounts.
This is rapidly changing. Just this year, several major financial institutions have come out with their own prepaid debit cards. Leading the way is American Express (NYSE: AXP). With this new product offering, AMEX is hoping that it will appeal to a broad range of customers. It is also putting full support and marketing behind this offering, when it was intially rolled out, the prepaid card had a minimum balance of $2,500, this has now been increased to $5,000 and this product is marketed to consumers with incomes of $70,000 and higher.
Marketing prepaid debit cards to the affluent hasn't only occured to AMEX, JP Morgan Chase (NYSE: JPM) launched a product called Chase Liquid, the card was rolled out in about 200 branches first and is now offered nationwide. US Bank (NYSE: USB), Capital One (NYSE: COF) and Wells Fargo (NYSE: WFC) also offer prepaid cards.
Right now prepaid debit cards is a booming industry with an expected $82 billion to be loaded onto these cards by the end of this year.
What is making these cards so attractive now is that they are very different than what was traditionally offered by companies like Green Dot (NYSE: GDOT) or even Dollar General (NYSE: DG). The fees on the newer cards are very low. Chase Liquid has only one fee: a flat monthly fee of $4.95 and Amex's prepaid card's only fee is a $2.00 charge for ATM withdrawals.
In addition each company plans to lure customers to its product with their own specific benefits: JP Morgan Chase representatives have stated that the main customer for the Chase Liquid card is a consumer who wants a checking account, but cannot get one. This also seen as a way to expose consumers to their wide range of products and after a time of consistent usage bring them into the JP Morgan Chase family of products.
American Express offers much of the same benefits of their charge card to its prepaid card holders and will even go so far as to select certain users that may apply for a regular American Express green charge card.
With this new product offering the banks have created a new source of revenue for themselves and affluent consumers now feel they have a new toy to play with.
Make no mistake, prepaid debit still has a lot of flaws, but here are a few tips if you are interested in getting one:
Watch out for fees: The average prepaid card charges nearly $300 in basic fees a year, this includes monthly charges, ATM fees, and reloading fees. In addition to these basic fees, there can also be activation fees, transaction fees, bill payment fees etc. Be sure to check the list before you sign up.
If you can open a conventional checking account, you will run into fewer charges.
They don't build credit: Using a prepaid card does not help you build your credit with the three major credit bureaus. Some cards will actually advertise that they report to the credit bureaus or "alternative" credit bureaus. Don't be fooled, they do nothing to boost your credit score.
One "maybe" exception: American Express has a program called "Make Your Move." Through this program prepaid debit card users that use and reload their cards regularly and that AMEX deems creditworthy can be invited to apply for a conventional American Express charge card after six months of prepaid card use.
Prepaid cards are missing important protections: These products right now are under-regulated. If your card is lost or stolen, you may not get your money back. So if someone steals your card and makes fradulent purchases, you may not get that money back. Even if the card issurer says they offer the same protection as a bank, it is voluntary, so they are able to revise or rescind their contracts at anytime.
There is definitely a big push right now to bring prepaid debit cards into the mainstream, but be sure to read the paperwork very carefully before getting one.
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