(cross-posted from Univision News)
By Janis Bowdler
Thanks to an increase in prepaid cards, the question of paper versus plastic no longer applies to just grocery bags. It is now a question about how you prefer to pay for daily expenses. Prepaid cards are reloadable payment cards that are issued by banks―and therefore come with certain protections and Federal Deposit Insurance Corporation (FDIC) insurance―and carry the American Express, Discover, MasterCard, or Visa logo. In 2009, $124.6 billion were loaded onto prepaid debit cards, and the market is expected to reach $308 billion by 2012. The rise of prepaid cards is undoubtedly due in part to their focus on a key market segment: America’s nine million adults without a traditional bank account, known as the “unbanked.”
According to a study by the FDIC, nearly 20% of Latinos are unbanked. While some insist that the problem lies in a lack of education, many cite good reasons for rejecting traditional bank accounts, such as “gotcha fees” and minimum balance requirements. Still, running a household without a bank account can be costly. The FDIC estimates that families without a bank account spend as much as $700 per year just on routine transactions such as cashing checks and paying bills.
While many in the industry are pointing to market opportunities, local branches are having a hard time wooing the unbanked. This is in part because the economics break down on both sides of the equation―banks claim that the segment is expensive to serve, and consumers find traditional accounts inconvenient. This is where prepaid cards offer some promise. Financial companies, community banks, and Uncle Sam are turning to prepaid cards as a cheaper way to deliver the functionality of checks, and there is evidence that consumers once shut out of the banking system are responding positively. Last year, the National Council of La Raza (NCLR) surveyed VITA clients in five cities where prepaid cards were available for those without traditional bank accounts. Card users gave the product high marks. They enjoyed the convenience of plastic and the control of only being able to spend what they have on their prepaid card.
As with all banking products, consumers must still be on guard. In our survey, some card users were hit with high fees unexpectedly or charged more when they became unemployed and lost their direct deposit. Prepaid cards have the potential to become a real alternative to costly transaction services if they offer a simple and transparent fee structure and the security of a traditional bank account. As this budding market expands, we urge the prepaid card industry to adopt the highest standards of accountability. Doing so will establish a credible financial tool that safely expands the financial opportunities of unbanked families.