There’s no question anymore: Prepaid debit cards have shifted from the fringe to the mainstream. The tipping point was Tuesday, when JPMorgan Chase & Co. announced a pilot program to launch a prepaid debit card called Liquid. It’s currently in 200 branches in two markets and will be available everywhere else this summer.
The biggest bank in the country has entered the market and — by default — the ongoing debate about the role prepaid debit cards play in consumer banking today. Wells Fargo already debuted a prepaid debit card a couple of months ago, and it’s a smart bet that other large banks will follow their lead and enter the prepaid market more aggressively.
So, should you get one?
The answer depends, to some extent, on your circumstances and preferences, and the available alternatives. To help you decide, here’s a look at some of the pros and cons.
Legal Protections (or Lack Thereof)
The drawbacks of prepaid cards fall into two categories: laws and fees. The problem with the laws is that there basically aren’t any. The prepaid debit market is virtually unregulated and there’s no legislation to protect cardholders the way there is with conventional credit cards and bank accounts. A fragmented market also means it can be hard for a person to comparison shop between cards.
The bigger players in the prepaid space are addressing these concerns to try and banish the connotation that prepaid cards only are for people on the financial margins. Nearly all extend the same consumer protections you get if your conventional debit card is lost or stolen and used fraudulently, and protect your money via FDIC insurance in the event of a bank failure.
Consumer advocates say voluntary adherence to the rules governing bank accounts is still risky, because companies can withdraw these protections in the future if they want. And consumers might assume that a prepaid debit card carries the same protection as a conventional credit or debit card without checking the fine print to make sure.
A recently released focus group study conducted by Pew Health Group found that most people aren’t wild about prepaid debit card fees, but they tend to say the fees are both smaller and better-disclosed than checking account fees, which tips the scales in favor of prepaid.
The truth of this perception depends on the card. While some cards pile on the fees for getting cash or checking your balance at an ATM, for talking to a customer service agent, and sometimes even for closing the account, others — especially newer entrants to the market — take it easy on the fees and offer customers ways to avoid them. In a recent “average use” study, nonprofit group Consumer Action found that people would pay anywhere from $10 to $27 a month, depending on which card they have. That’s around $200 a year if you pick wrong.
This is actually one really good reason to welcome Chase’s entrance into the prepaid market. While the Liquid card has a $4.95 monthly fee, most other transactions are free if customers stick to using Chase’s branch and ATM networks for transactions — which probably won’t be hard, given that there are 5,500 and 17,500 of them, respectively, in the U.S. With competition like that, fee-heavy issuers might need to dial it down a notch or risk losing their customers.
Two months ago, the industry group Center for Financial Services Innovation developed a model disclosure box it urges prepaid debit card issuers to adopt. The box lists common fees in plain English and displays them in a grid format that’s easy to understand. A handful of issuers, including GreenDot Corporation, which was the biggest fish in the prepaid pond until Chase came along, have adopted the disclosure box.
So, Should You Get One?
Ultimately, your decision should depend on what you’d be using it for. When prepaid debit cards first hit the market, they were pitched as alternatives for people who couldn’t qualify for a credit card. In this case, prepaid debit is a really poor substitute because the vast majority do absolutely nothing to help people build credit. If your credit stinks, save up a few hundred bucks and get a secured credit card. You’re using your own money — just like you are with a prepaid debit card — but the issuer is reporting your on-time payments to the credit bureaus, which means you can eventually “graduate” to a conventional credit card.
Some people like prepaid debit cards because they’re spending their own money — there’s no temptation to overspend and no way to run up debts. Indeed, prepaid debit is a reasonable alternative for people who really can’t control their spending, but we’d recommend they combine that card with some financial literacy education so they can work toward a point where they can use credit responsibly.
More recently, prepaid debit cards have been positioned as alternatives to high-fee checking accounts. If this is your primary motivation, there are reasons to seek better alternatives. For one thing, you can still find free checking accounts; you might have to look at smaller banks and credit unions, or have your paycheck direct-deposited every month, but they’re still out there. Second, if you never or rarely need to visit a traditional bank branch, you might want to consider opening an account at an online bank, where checking fees tend to be low or non-existent. (The biggest ones even offer their customers paper checks now.)
Interestingly, some of the participants in Pew’s focus group said they prefer prepaid cards because they simply don’t like banks. “They’re just lulling you into the sense of comfort because they’re going to whammy you with fees on the backside,” one woman commented. Given that sentiment, the question going forward is whether customers will want to buy prepaid cards from the large, mainstream banks whose high fees spurred the growth of prepaid debit cards in the first place.