Unless you’re a whiz at managing your money, a checking account is going to cost you more than a prepaid debit card, a new report concludes. And if you do a really poor job handling your personal finances, you could end up paying as much as $65 per month extra for a checking account.
Updated at 6:35 ET on 9/13/12
Banks have been pushing prepaid debit heavily, both to get unprofitable customers off their deposit accounts and to circumvent the interchange fee cap on conventional debit cards. Consumers who have been burned by $35 overdraft fees and escalating monthly maintenance fees have embraced the cards. There’s a trade-off, however: The prepaid market has little to no regulatory oversight, a wide variety of fees that make it tough for people to comparison-shop, and some outright predatory practices.
In a new study, the Pew Charitable Trusts looked at 52 prepaid debit cards that comprise 75% of the market. It compared the costs of using these cards to the cost of having one of the 237 conventional checking accounts offered by the 12 largest banks in the United States.
Researchers created three model customers: a financially savvy one who makes every effort to avoid fees, an “average” one who overdraws or has their card declined once a month, and a hapless one who tends to overdraw, use out-of-network ATMs, and racks up considerable service fees. It set some baseline assumptions, like a $1,500 direct deposit and 17 point-of-sale purchases (the average among debit users) every month.
Budget-minded people fare slightly better with checking accounts; the average monthly service fees come to $3.99 for a checking account, versus $4.50 for a prepaid card.
For everybody else, though, even people who handle their money responsibly most of the time, prepaid debit is cheaper. The “average” model customer would pay $28 in checking account fees and $22.15 in prepaid debit card fees monthly. For people who can’t or won’t be mindful of their financial habits, the difference is even sharper: These people would pay an average of $28.70 in monthly prepaid debit service fees, compared to a whopping $94 if they have a checking account instead.
Pew says in its conclusion:
Prepaid cards are a growing product that could provide a valuable and needed substitute for consumers who are unable or unwilling to maintain traditional checking accounts. While the fees for everyday services are generally higher for prepaid cards than for checking accounts, the trade-off for a product that does not allow overspending may be beneficial to many consumers.
Nearly all prepaid cards extend the same consumer protections provided if your standard debit card is lost or stolen and used fraudulently. Most cards also protect your money via FDIC insurance in the event of a bank failure. But the one big, fat downside with prepaid cards is that these protections are entirely voluntary. They’re not required by law, and if the card issuers decide they don’t want to provide these protections in the future, they can withdraw them.
Although focus groups have found that one of the biggest reasons people use prepaid debit cards as replacement bank accounts is to avoid overspending and getting hit with overdraft charges, some prepaid providers offer overdraft protection on their cards. Unlike bank cards, the consumer can be automatically enrolled in an overdraft plan, and they might not find out until a purchase puts them into the red and hits them with a hefty fee.
Granted, most of the bigger prepaid players don’t let customers overdraw, but the ones that are out there are financial land mines. The steep fees and short repayment windows mirror payday loan terms, which are notorious for drawing people into long-running periods of debt.
Even if you take this worst-case-scenario off the table, the problem remains that most prepaid debit customers don’t really know what they’re getting, or if they’re getting the best deal. There are no rules that require providers to disclose fees, and that knowledge vacuum makes it a challenge for people to figure out which card is the least-expensive pick for their spending habits. And people seeking a refuge from checking account penalty fees are the same people who are least likely to successfully navigate the cards’ complicated disclosure documents.
And there are a lot of those fees floating around. Pew found that prepaid debit cards generally list between seven and 15 different fees — but the fees one company lists aren’t necessarily the same ones their competitor discloses. In many cases, researchers found that prepaid providers don’t disclose information about certain fees at all.
For instance, 30 of the 52 cards studied stipulate that there’s a fee to talk to a customer service rep via phone, 11 say it’s free, and the policies of the remaining 11 are anybody’s guess. Like so much else in life, prepaid debit illustrates the saying: You get what you pay for.