Is the prepaid debit card moving upmarket?
In recent months, major financial institutions such as American Express and J.P. Morgan Chase have rolled out ambitious prepaid offerings that target a more financially secure market than the "unbanked" or "underbanked" customers who traditionally have relied on this popular form of plastic.
And in July, Kaiku Finance, a California-based card issuer, unveiled its debut offering a product simply known as the Kaiku Card that it is pitching not as a poor man's alternative to a credit or traditional debit card, but as a legitimate way to manage money.
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"We think prepaid can be of value and use to all types of consumers," says Kaiku Chief Executive Jon Round.
The market for prepaid cards already is surging, climbing nearly 20% in 2011 to $483 billion, according to the Mercator Advisory Group. It is expected to jump to $594 billion in 2013, and research suggests that the growth isn't being fueled merely by low-wage earners who don't qualify for traditional banking products. A recent report from research firm Aite Group found 33% of prepaid users have incomes above $45,000, and 15% earned more than $70,000. More than one-third have college degrees.
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One reason for the cards' broadening appeal is that issuers are getting more competitive on price, experts say. In the past, a $10 monthly fee wasn't unusual. Now Chase, for example, has a monthly fee of $4.95 for its Liquid prepaid card, while Kaiku's is $1.95.
And with a prepaid card, there is no "maxing out" one's credit, a key selling point for many consumers looking to reduce debt since the 2008 downturn.
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Others view prepaid cards as a good substitute for a checking account, especially the cards that offer online bill paying.
In that case, even a card with a monthly fee of a few bucks can be more cost-effective than a checking account with its own fees and required minimum balances.
Financial professionals caution that checking accounts offer advantages over prepaid cards, including the ability to write paper checks and make wire transfers. But they say the checking-free prepaid approach could work for those with simpler financial needs, such as the college-age market.
"A lot of people will find themselves starting their banking life with a prepaid card," says Odysseas Papadimitriou, chief executive of CardHub.com, a finance website.
Banks have their own motivations for reaching a broader audience. The Durbin amendment to the Dodd-Frank Act, which limits debit-card interchange ("swipe") fees, has led to a collective loss of $8 billion for banks since it went into effect in 2011, according to CardHub.com.
Prepaid cards, however, aren't always subject to the Durbin rules and can have higher interchange fees, making them a viable alternative moneymaking strategy.
Other banking executives say banks simply are responding to demand from customers for more innovative tools to help them manage their money.
"I think the main driving force is it's an exciting new product," says Nessa Feddis, a vice president of the American Bankers Association.