Should the 'Already Banked' Consider Prepaid Debit Cards?

Kaiku Card
Kaiku Card

Between the Great Recession and the consumer-oriented banking reforms that followed, it's gotten significantly harder for banks to earn big profits from consumer credit cards. And that's given them all the incentive they need to hunt down new products with which they can skim profits off of your purchases -- among them, prepaid cards. And they're not just for the "unbanked" anymore.

A few months ago, as you may recall, JPMorganChase (JPM) began touting a new prepaid debit card called Chase Liquid, with low fees of about $5 a month. The bank said its card is intended to introduce unbanked customers to the Chase brand, and give them a convenient way to pay with plastic.

Chase is far from the only bank capitalizing on this idea. Wells Fargo (WFC), Bank of America (BAC), American Express (AXP) -- these days, almost any big bank you've ever heard of is hawking a prepaid product of some sort. And now, even banks you've never heard of are, too.

Just this week, California-based card issuer Kaiku Finance floated something called a "Kaiku Card." The key difference is that Kaiku says it's not so much aiming to recruit unbanked customers to big banking's brand, but rather hoping regular customers will add another card to their wallet.

A New Name in the Card Game

Kaiku wants people like you and me, who have bank accounts, credit card accounts, and wallets already stuffed with more plastic than paper, to wedge the Kaiku Card in there as well.

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Kaiku argues that its prepaid card "can be of value ... to all types of consumers." Unlike a credit card, a prepaid card doesn't rack up debt, charge interest, or hit you with late fees. It's simpler than a checkbook to use, and entails none of the fees banks charge for maintaining a checking account.

Apparently, these are desirable attributes to consumers, whose prepaid card usage rose by 20% in 2011, and who are expected to spend close to $600 billion through prepaid cards in 2013.

What's in It for You?

Now here's the catch: While they act a lot like debit cards, prepaids are actually a different plastic animal. Not linked to a checking account, they're not technically debit cards -- and so not subject to the cap on interchange fees imposed last summer. Indeed, experts say that prepaids today are still "largely unregulated at the federal level."

The Consumer Financial Protection Bureau is considering regulations to help prevent abuses in the market. One day soon, it may be just as safe to put a prepaid card in your wallet as a standard issue debit or credit card ... if you can fit it in.

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Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of JPMorgan Chase, Wells Fargo, and Bank of America. Motley Fool newsletter services have recommended buying shares of Visa and Wells Fargo, as well as writing a covered strangle position in American Express.

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