Expensive alternatives to checking accounts becoming more popular

Prepaid debit cards can be difficult to differentiate from credit and debit cards, except for the high fees. Image: mecklenburg / Flickr / CC BY

It has been a few months since new card fees, banking rules and overdraft regulations went into effect. Some of the biggest banks are exploring prepaid cards as a way to recapture income lost from new fee limits. Prepaid card associations are lauding the product as a great alternative, while consumer groups are warning that they can be very expensive.

Growth in the prepaid card market

Between 2005 and 2009, the number of active users of prepaid cards grew from 700,000 to 3.4 million. The growth of the market is expected to continue, according to the Wall Street Journal. By 2014, prepaid cards are expected to have 7 million users. These numbers do not include payroll cards, which are very similar to prepaid cards. Combined, the prepaid card market could account for more than 9 million customers in the United States.

The argument for prepaid cards

The majority of prepaid debit cards are offered by non-bank businesses. The cards are often marketed in stores offering instant payday loans, convenience stores and grocery stores. Many big-box stores such as Walmart and Target offer branded prepaid cards. A report issued by Bretton Woods Inc., a consulting firm hired by the Network Branded Prepaid Card Association, argues that customers of prepaid debit cards will pay less than half the fees of consumers with standard checking accounts. The report also lauds prepaid cards as a money-management tool, as users can only spend what is loaded onto the card. Prepaid debit cards also offer an alternative for customers who do not use a traditional bank.

The argument against prepaid cards

A report by Consumers Union, the publisher of Consumer Reports, says most prepaid cards tend to be more expensive than checking accounts. Nine of the 12 cards studied were more expensive than the five comparative checking accounts. Checking account fees range from $0 to $438 per year, depending on the products and services used. Prepaid debit cards charge fees range from $18 to $606 per year. The analysis also highlights that most pro-prepaid studies assume that all checking accounts charge overdraft fees. However, since Dodd-Frank consumer protection laws went into effect, only about 22 percent of checking customers have opted into overdraft protection. In short, prepaid cards can be more expensive than traditional checking accounts. Prepaid cards can be helpful for customers who cannot get bank accounts, but card applicants should keep a close eye on the fees.