This time last year, several large banks announced they were adding debit-card fees to non-ATM transactions at retailers. This was to make up for the revenue they were losing thanks to a financial reform law that capped how much they could charge merchants.
The moves did not go unnoticed: The banks that proposed such fees -- Bank of America (BAC), JPMorgan (JPM) Chase, Wells Fargo (WFC) and others -- suffered wide-scale, high-profile backlashes, and ultimately rolled back the programs.
But the idea hasn't gone away entirely. It's only taken a new form.
Why You're Seeing More Prepaid cards
There's a new wave of plastic filling the middle ground between interest-charging credit cards and low- or no-fee debit cards. They are refillable cards -- or prepaid cards -- that act like a hybrid of both.
They're an attractive option for consumers -- and a convenient way for banks to sidestep recent consumer protection laws.
These new cards offer many of the benefits customers want. With bill pay, mobile apps, and features that rival those of traditional debit cards, prepaid cards are an alternative for customers who either don't have or don't want to use checking accounts and/or credit cards.
But because the caps that affect traditional ATM cards don't affect prepaid cards, banks are free to collect fees that they couldn't charge any other way.
A Fee by Any Other Name
Nearly all major banks now offer prepaid cards. The terms and fees vary widely, as do features, loss and theft protection, and FDIC claims.
Although these banks appear to make fees fairly transparent, hidden fees are just that -- hidden. There are no standard terms across the prepaid market, and comparing features and fees is often difficult.
Take, for example, the prepaid card offered by one of the banks caught up in last year's ATM debit-card swipe-fee scandal last year-- JPMorgan Chase. Its prepaid Liquid card has no activation fee and can be reloaded at Chase ATMs or branches. With a $4.95 monthly fee, the card also has other fees for "special circumstances" that aren't exactly all that special -- a $2 charge for withdrawals at non-Chase ATMs, international transaction fees, and cashier's check fees.
Called possibly "the best deal yet" by BusinessWeek, Bluebird is the new joint venture between American Express (AXP) and Walmart (WMT), designed for lower-income families who may not have a regular checking account. There's no activation fee, no minimum balance requirement, and no monthly fee for Bluebird. However, if you sign up for the card at Walmart, an account set-up kit will cost $5.
Unlike Chase's Liquid card, Bluebird offers purchase protection and roadside assistance, and zero foreign transaction fees. Both cards offer fraud and/or identity protection.
Tips for Going with Prepaid Plastic
Using a prepaid card isn't the no-brainer that banks lead customers to believe. According to a report by The Pew Charitable Trusts titled "Loaded With Uncertainty," "[T]he prepaid card is a risky, largely unregulated alternative to the traditional checking account, but may work for some consumers who frequently incur high bank overdraft fees."
Customers should only purchase prepaid cards in person at a branch or storefront, or directly from the bank's official website for the card. Avoid purchasing bank-name prepaid cards from third-party sites. For more information, the Consumer Financial Protection Bureau has compiled a list of the most frequently asked questions about prepaid cards.
While prepaid cards will never replace the need for a checking account or for establishing responsible credit, if used properly, they can do more than just offer a alternative to traditional debit cards.
For people who want to wean themselves off overdraft fees, budgetless spending, or high-interest credit cards, prepaid debit cards can be a valuable tool. For individuals with a full suite of banking products, prepaid debit cards have the potential to replace travelers' checks, gift cards, and even store layaway for holiday shopping.
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