Prepaid Cards On The Rise

Traditionally, prepaid cards have been used by people without bank accounts (which describes one in five Americans) and federal agencies giving out benefits. But prepaid cards are one of the newest financial trends, with use of them rising 68% from 2010 to 2011, making them the fastest growing payment method in the nation. And it's not just lower-income sections of the populace using them now. Many middle to upper class consumers are looking at pre-paid cards as a way to ensure they don't trudge in the murky waters of debt. They're also frequently being used to fund students studying abroad.

Many issuers are looking to incentivize consumers to utilize prepaid cards by eliminating overdraft fees, as is the case with the Green Dot prepaid card. Green Dot, which has more than 4.3 million cards in circulation, receives a large amount of its new customers from ex-bank account holders at their wit's end. Indeed, many consumers are also looking at prepaid cards as a welcome respite from the exorbitant fees being charged by banks, although ironically more and more banks are relying on prepaid cards to generate extra revenue.

Accordingly, many issuers have also eliminated maintenance, reloading and activation fees, which have all been traditional caveats to prepaid plastic. While the cards can't help you to build financial leverage with a credit bureau, as is the typical draw of a credit or debit card, some people are looking at them as a small step toward financial responsibility, as they essentially force you to limit your own spending ability beforehand.

Prepaid card funds are insured by the FDIC, just like other payment methods, but do not run up the traditional interest of a credit card. This may be one of the catalysts for the swarm of consumers looking to purchase them. In 2011, $70 billion dollar was placed onto prepaid cards. That number is expected to hit $120 billion, nearly double, this year. What's the message here? Well, there's probably a few. One is that the economy is still weak, and consumers are reluctant to accrue more debt on a credit card. Another message is that merchants should make sure their credit card processing systems are configured to transact purchases from prepaid cards or risk losing some major business—approximately, their slice of a $100 billion dollar pie.

Perhaps the third and most important message to be gleaned from the rise of prepaid cards is that Americans may finally be starting to think about lessening debt, although only time will tell how serious we are about rising to that challenge.  

Big Banks, Smaller and Smaller Loans

There is great debate over how big of role of big banks have in spurring economic growth with small business loans. Some analysts argue they're doing enough, while others point to the hefty federal bailouts the nation's biggest banks have received and ask why more of that money isn't being flushed back into the system in order to create job growth and healthy small businesses. We can list some facts, but must keep in mind that facts bend and can be used by virtually anyone to prove a point. First, let's define what constitutes a small business. On a purely financial basis, small businesses or usually thought of as businesses with a revenue of $20 million of less. These businesses depend on banks for loans so they can expand their services and infrastructure and invest in new business models, like e-commerce, cloud services, and virtualization. Without loans, most small businesses can't grow into big businesses.

Unfortunately, recent numbers released by the FDIC paint a dismal picture of the role big banks play in supplying money to small businesses. The top 5 banks in America—Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo, and Goldman Sachs—only contributed 16% of the nation's small business loans, even after these same banks took in a combined $151.59 billion in TARP bailout funds and sit on 40% of the nation's deposits. As a result of these poor loan figures, many small business owners who need loans are not even requesting them. Many financial analysts feel this is not the kind of entrepreneurial atmosphere that will trigger economic growth.  

On the other hand, one can also look at these numbers as signs that financial institutions are practicing more stringent oversight. We've seen what can happen when millions of loans are issued to people who can't repay them. This resulted in the crash of the housing market that contributed greatly to our economic stagnation. While small businesses originally benefited from this inflated consumer confidence, they are now suffering from an epidemic of stingy lenders. Is it that the big banks are trying to prevent a similar crisis from delinquent small business owners by encouraging better credit and more responsible loan delegation? Or do we have reason to think that the institutions who have been deemed “too big to fail” don't feel the same way about America's collective entrepreneurial spirit? After all, if banks are too big to fail, so are the people who invest their money in them.

The "Buffett" Rule

Warren Buffett, the billionaire magnate, investor and philanthropist, has been getting a lot of face time in the news these past couple years. He made waves all across the media with his assertion, in a New York Times op-ed, that the super-rich in America were getting “coddled” and should be expected to pay more in taxes. Famously claiming that he wanted to pay more in taxes, Buffett has been a strong adversary to the Bush-era tax breaks for rich people and corporations, calling for higher rates on investments.

President Barack Obama's 2013 budget proposal will pay tribute to Buffett with something called the “Buffett” rule, which will replace the alternative minimum tax that was originally established for the purpose of limiting the deductions rich taxpayers could use to reduce their taxable income. The rule calls for a tax increase of $1.5 trillion over the next decade (around $36.7 billion a year) in a plan that will effectively end the Bush era tax cuts and mandate anyone earning more than $1 million a year to pay 30% in income taxes.

In what will almost assuredly result in a fiery election year showdown with Republicans, Obama's proposal specifically calls for a reduction in tax breaks to the wealthiest Americans and U.S.-based multinational corporations. In his budget message, Obama said that Americans earning “$50,000 a year should not pay taxes at a higher rate than somebody making $50 million.”

Opponents of the plan say it will cause investors to dial down their spending, which will effectively stifle innovation and business growth. Most of these critics want deficit reduction to come from a reduction in funding for “entitlement” programs like Medicare, Medicaid and Social Security. The major points of contention revolve around the marginal tax rate, or tax bracket, which affects how much someone will be paying in taxes after deductions and credits.

Theoretically, an investor such as Warren Buffet is currently protected from a top 35% rate by the accumulation of capital gains, dividends, and other forms of interest enjoyed by hedge fund managers. This “carried interest,” as it is called, essentially amounts to untaxed investment funds paid to managers by private equity. This is also known as a “performance fee,” from which most wealthy investors receive a great deal of their annual income. Fiscal conservatives don't consider performance fees to be entitlements.

We can expect a mighty congressional showdown later this year over the “Buffett” rule. In the meantime, we'll be treated to more rhetoric and number-crunching by politicos attempting to wrangle the facts of the tax code to fit their ideologies.