Thursday, March 22, 2012

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.  

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