The problems with prepaid debit cards have been so well chronicled by the media lately that anyone launching one has to come up with a new hook that obscures what the product really is: a no-frills checking account with high fees and less flexibility. When he unveiled his RushCard, hip-hop mogul Russell Simmons touted it as a salvo in the battle against the exploitation of just about every disadvantaged group you could imagine: “Debit cards are what keep the under-served — including minorities, immigrants, the poor, soldiers, veterans and students — from the claws of payday lenders and check cashers, from humiliating lines waiting to cash their paychecks and then more lines to pay their bills.”
But one of the more intriguing entrants into the prepaid card industry is a small company called BillMyParents, which has embarked on an aggressive marketing campaign to pitch the prepaid card CEO Mike McCoy, former President of Wells Fargo Consumer Credit Cards, told me represents “an opportunity to teach responsible spending and to do it before young adults have developed poor spending habits.”
The prepaid card comes with some added bonuses–and that is where the potential teachable moments come: You can load the card with your kid’s allowance and then, every time your kid makes a purchase, you’ll receive a text message notification. If you’ve decided he’s spent too much and needs to learn a lesson about restraint, you simply text “1” to the company to lock the card, and then you can text “2” to unlock it. The card is blocked from being accepted at liquor stores and casinos and, in the future, McCoy says, you’ll able to block the card from being used at whatever retailers you decide you don’t want your kid shopping at (I’d block Hot Topic). On the plus side, there’s also a feature to let you (or a friend or relative) transfer funds into your kid’s account instantly from your smart phone in the event of an emergency. It is, the company says, “like a GPS for your teen’s wallet.” McCoy says that text message alerts and parental controls “drive the dinner table conversation” toward financial issues that otherwise go un-discussed.
But the high-tech big brother way the card offers that strikes me as a combination of helicopter-parenting and the KGB. And like nearly all prepaid cards, there are fees: a $3.95 monthly fee, $1.50 ATM withdrawal fee, 50 cent ATM balance inquiry fee, $7.95 for a replacement card, and $3.00 if you go 90 days without using the card. Those fees might not seem egregious (and by the standards of prepaid cards, they aren’t) but given that the most you can have on the card at any one time is $2,500–and most teens won’t even have that much–the fees as a percentage of the amount spent each month end up being quite high. Like most prepaid cards, the company touts the fact that there are no overdraft fees associated with it, but that’s a red herring: turn off overdraft protection on a checking account and you can have no overdraft fees there too and most banks offer student checking or no-frills checking accounts that give you a debit card without overdraft fees, maintenance fees, or minimum daily balances—which are the main purported benefits of prepaid cards.
So in order to make sense, the card has to be viewed for its educational/parental monitoring potential. Is the ability to monitor your kid’s spending in real-time and shut off his debit card with a single text message worth $3.95 per month? Parents probably have to decide that for themselves and while I’m loathe to ever say anything nice about a prepaid card, I do think BillMyParents is a well-intentioned effort to offer a new way for parents to help their kids develop financial skills; the company is hardly getting rich off the fees and to date, has not turned a profit.
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But the risk with products like BillMyParents is that you’ll manage your kid’s financial life so well that he’ll never have the opportunity for that all-important character building experience of having his card declined in front of six of his friends at a 7-11 when he tries to buy a Vitamin Water. Sometimes Darwinism is the best teacher and will do more to instill sound financial habits than all the apps, parental controls, and financial literacy products on the market, without any monthly fees. On the other hand: If your have a kid who is struggling with reckless spending and constantly running out of money, the card presents an intriguing, if heavy-handed, new way to monitor use and impose limits.