There's no doubt about it: Prepaid, reloadable debit cards are darned popular. So popular, in fact, that the brand-spanking-new Consumer Financial Protection Bureau wants to regulate them, after hearing complaints about high fees and lack of protections usually afforded customers with traditional bank accounts.
An incredible growth market
The prepaid debit card industry has been growing by leaps and bounds. Research indicates that the current prepaid market, valued at approximately $57 billion, is set to expand to $167 billion in two years. Why are these cards so popular? Because they are convenient -- and, in most cases, cheaper than a checking account.
Reloadable debit cards are extremely attractive to the unbanked and underbanked, people who often are also low-income earners and often can't afford fees associated with conventional checking accounts. They are also favored by millennials, regardless of income, who tend to eschew traditional styles of banking.
In an effort to take advantage of both of these demographics, American Express (NYS: AXP) has recently debuted a new prepaid card aimed specifically at college students, which is being hawked at college bookstores run by Barnes & Noble. American Express launched another reloadable card earlier this year at Wal-Mart stores in an attempt to snare low-income customers, a group that the company had traditionally ignored.
Netspend (NAS: NTSP) , a biggie in the general-purpose, reloadable debit card market, has recently teamed up with Family Dollar to sell its NetSpend Visa prepaid card through the discount retailer's 22,000 store locations, starting with 7,200 retail spots this month. It's not difficult to guess which socioeconomic sector is being targeted here.
Banks find these instruments particularly useful as a way to make up for fees capped by recent legislation. JPMorgan Chase (NYS: JPM) will begin selling its new Liquid reloadable card at over 5,500 branches this summer. Wells Fargo (NYS: WFC) also touts a prepaid card, but no longer sells them through branch locations, opting to offer them only online. US Bancorp (NYS: USB) also offers these types of debit cards, one of which is aimed specifically at teenagers.
Not all reloadable cards are created equal. Some can get downright expensive, especially if they are not used judiciously. Among the bank cards, JPMorgan's Liquid and US Bancorp's product are among the cheapest, at $4.95 per month with no charge for services such as adding money to the card. Wells Fargo, on the other hand, charges $3 to use a bank teller to withdraw money, and $5 to reload the card, unless the customer uses direct deposit or a Wells charge card.
Interestingly, it's not the actual fees that the CFPB is most concerned with -- it's the transparency regarding those fees, as well as disclosures about FDIC protection and card-loss protection. Just nosing around the Internet, I found Wells Fargo to be the most upfront about their fee structure; others less so. JPMorgan's and US Bancorp's cards were mentioned fairly often in articles on the subject, though, so it was easier to find out how cheap they are.
There are pots of money to be made with these little treasures, and regulation won't stop the money pouring in. Banks and other companies offering these products should just bite the bullet and be honest about their products' features, or lack thereof, during this investigational time frame. That way, there will be a whole lot less for consumer groups and regulators to complain about when it comes to actually writing those new rules.
Learning to control your finances is a skill that becomes more and more important as you approach retirement. Check out the excellent savings tips and three investment strategies our Fool experts have worked out for you by reading our free report. Do it now -- you can access it here.
At the time this article was published Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. Motley Fool newsletter services have recommended creating a write covered strangle position in American Express. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.