Last week, the Consumer Financial Protection Bureau (CFPB) released a comprehensive report on overdraft fees, finding that Americans paid about $15 billion in fees for bounced checks and overdrawn accounts last year. And though the average overdraft is about $24, consumers are usually hit with a fee of around $34 per overdraft—a situation in which the punishment is far more severe than the crime. Overdrafts remain such a pernicious problem for Americans—particularly the less wealthy among us—that fees, or else the fear of them, have actually led to changes in behavior. Namely, millennials are increasingly turning to debit and prepaid cards to ensure that the money they spend is money they actually have, and underbanked lower-income families rely on prepaid cards for much the same reason.
Though these cards don’t offer the rewards or interest or credit-building opportunities that credit cards and other forms of paying promote, they are seen by many consumers as the safer choice. Available from most retailers, prepaid cards are reloadable and offer the convenience of a credit or debit card without requiring a bank account, approval process, or credit check. That’s likely why Americans stored an estimated $100 billion on these cards in 2016, up from less than $1 billion in 2003—making them one of the fastest-growing financial products in the country. Driving the point home that these cards are used as a stand-in, not an add-on, to traditional accounts, a Pew Charitable Trusts study estimates that more than a quarter of prepaid-card users don’t have a bank account.
The significant growth in pre-paid card utilization can in part be attributed to a growing debt-averse culture, largely driven by young adults keen on avoiding the fees that often come with credit cards or traditional accounts. In fact, last year, 80 percent of prepaid card users were millennials or Gen X-ers.
The other factor playing into prepaid cards’ increasing popularity has to do with the versatility of the cards on offer. Prepaid phone cards first came on the scene in the 1980s, and then diversified throughout the 1990s into other types of closed-loop cards that could be redeemed only at specific merchants—in other words, as gift cards. Open-loop prepaid cards, on the other hand, can be loaded with money and used at any merchant that accepts credit and debit cards. These came to be as EBT cards in the early 1990s, and open-loop, open-ended gift cards followed shortly thereafter. The option to reload them at various retailers or online made them all the more convenient. Since then, open-loop prepaid cards have exploded in use, largely because of several major companies driving their ubiquity. Companies with more than 1 million active prepaid cards as of last year include H&R Block, Green Dot, and American Express, which manages the popular Bluebird and Serve cards.
Green Dot, founded in 1999, truly pioneered the mass use of prepaid cards as we know it today. While you can now expect to see them at virtually every checkout counter, when Green Dot first made cards available at Rite Aid, Walmart, and other widely accessible merchants, the idea of buying an off-the-rack Visa was revolutionary. Green Dot paved the way for bringing financial convenience to the young and unbanked, and continued innovating by introducing a “cash reload network” in 2004, where customers of any prepaid card issuer, including Green Dot’s competitors, could add money to their cards at Green Dot retailers.
In 2007, the company launched the MoneyCard in collaboration with Walmart, which, by 2015, comprised about half of Green Dot’s annual sales. By 2010, Green Dot cards were being sold in more than 50,000 stores nationwide, and six years ago, Green Dot obtained a bank charter, giving it ability to offer a wider variety of financial services. In 2013 it launched an alternative checking service called GoBank (later made available through Walmart) that included a vault feature, so users could designate some of their funds as savings. By 2015, Green Dot had more than 4.5 million active cards.
In other words, Green Dot found ways to use prepaid cards to truly revolutionize the banking industry—by not requiring a bank at all.
Interestingly, banks are intrigued by the prospect. Green Dot’s proven success and the general interest in prepaid products has led incumbents to enter the market. While conventional wisdom once held that financial institutions were content to have these consumers served by others, JPMorgan Chase, U.S. Bank, Regions Financial and Wells Fargo have rolled out prepaid products of their own—motivated, no doubt, by the fact that they’re exempt from Dodd-Frank regulation, meaning banks can pass high fees down to merchants when consumers use these cards.
And fees for prepaid cards are currently the trickiest aspect of the system to navigate. For all the advantages prepaid cards offer, customers are often still stuck paying fees: fees for the card, for adding funds to it, for making ATM withdrawals, or for using cards at other merchants (for instance, there’s a fee to use the MoneyCard somewhere other than Walmart). But according to Lisa Servon, the author of The Unbanking of America: How the New Middle Class Survives, consumers consider these fee structures to be at least more transparent and predictable than fees for credit cards and overdrafts.
And next year, when new rules put in place by the CFPB go into effect, they may become more so. In an effort to ensure secure transactions and help consumers understand all fees associated with the cards before they buy them, the new rules standardize fee disclosures and protect funds stored on the cards, which aren’t FDIC-backed. The proposal survived an assault by congressional Republicans, and once it goes into effect, it will make prepaid cards easier to understand and to use. (And, it’s worth noting that other stored value accounts — ranging from PayPal to Google Wallet — will also be subject to these new rules.)
In the meantime, prepaid cards are likely to continue to grow in popularity. Nearly $112 billion is expected to have been loaded onto prepaid cards by 2018. Moreover, companies are continuing to find new ways to use open-loop prepaid cards, for example to pay for [bus and subway fare] (https://www.securetechalliance.org/publications-prepaid-cards-for-transit-agencies/) in cities.
Prepaid cards are becoming increasingly specialized, too, some even offering rewards or discounts when used at certain stores. And as security measures become more sophisticated, the next wave of prepaid cards can hope to see EMV or tokenization, which will further reduce fraud, further increasing the ease of use and appeal of prepaid cards.