Prepaid debit card providers have never shied away from competing with large banks when it comes to traditional checking accounts. As many banks have been raising fee revenue to boost profits, they have left themselves open to competition from this up-and-coming industry.
If you listen to the prepaid card providers, you might believe the case is open-and-shut. NetSpend calls its card “a lower-cost alternative to banks.” RushCard claims its prepaid debit card as “the better alternative to traditional banking.”
But the question remains: are prepaid cards really cheaper than checking accounts? We put this question to the test by examining a dozen prepaid debit cards for information on their typical fees.
Even the best of the prepaid debit cards couldn’t keep up with local banks, credit unions, and online banks, many of which still offer attractively priced checking accounts. It’s clear: For the majority of consumers, a low-cost or free checking account remains the better option.
Death By A Thousand Paper Cuts
There’s no doubt that more banks are charging monthly fees for checking accounts nowadays. In fact, research indicates that approximately 40 percent of noninterest checking accounts were considered free, down from 68 percent just five years ago.
But prepaid debit cards — despite their claims — are charging even more to use their services. For instance, two-thirds of the 12 cards in our research had monthly maintenance fees. And the prepaid card fees didn’t stop there. Unlike traditional checking accounts, which offer financial services such as free access to the bank’s ATM network, free customer service, and free bill pay bundled together in an “all-you-can-eat” buffet of services, prepaid debit cards charge for a set of specific transactions each time you make them.
What does this all mean in cold, hard cash? Traditional banks charge an average monthly maintenance fee of $4.37 while prepaid debit cards charge a whopping $9.28 per month on average. And that doesn’t include check-cashing fees and the cost of loading cash onto a prepaid debit card, which usually involves buying a Green Dot MoneyPak or some other similar transactional service.
If you deposit $100 into a traditional checking account, there is no charge… and we all seem to take that for granted. But if you want to load $100 onto a prepaid debit card, that might cost $4.95 and that’s a significant bite out of your bottom line. Our research indicates that the rate structure of prepaid debit cards can be like experiencing death from a thousand paper cuts.
However, if you insist on using a prepaid debit card, we strongly recommend setting up a direct deposit to avoid such costs.
The Best Feature of Prepaid Debit Cards… Really Isn’t
One of the reasons people select prepaid debit cards is that they do not allow overdrafts. And we all know overdraft fees can be a painful way to conduct your financial matters. Often, overdraft fees can reach north of $35… even if you are short by a couple of dollars or even pennies. Plus, excessive overdraft fees can lead to a ding in your credit report. So, serial overdrafters choose prepaid debit cards to avoid the cost of overdraft fees.
Fortunately, there’s an easy way to avoid debit overdraft charges on a traditional checking account. Federal Reserve rules require banks to seek customers’ approval before enrolling them in such programs. Customers can simply opt-out.
In order to make a bank account a lower-cost option, you have to say ‘no’ to overdraft coverage and then you have to very carefully monitor your available balance so that you don’t write a check that is not covered with the money that you have on deposit or you don’t set up an electronic payment.
To be clear, those who have trouble managing a checking account will still be on the hook for overdrafts and if you write several checks each month, that might get challenging. That’s why we strongly recommend using your checking account debit card whenever possible instead of writing checks.
Consumer Protection: Improving, But Not Perfect
Because they’re fairly new products, lawmakers and regulators haven’t had time to solidify consumer protections for prepaid cards to the same degree as checking accounts.
For instance, prepaid debit card balances are parked at a bank contracted by the prepaid card company. It’s not clear whether an individual prepaid debit card holder’s balance would be protected if the bank failed.
There are questions about the extent to which FDIC (Federal Deposit Insurance Corp.) insurance protects the money that is being held in a pooled account. Those accounts have to be structured in such a way that the card issuer can identify the individual persons so that the insurance passes through to protect you individually.
Fraud protections also are lacking, which could come into play should a thief steal a prepaid cardholder’s payment information.
That’s because general-purpose reloadable prepaid cards aren’t covered under Regulation E of the Electronic Fund Transfer Act, which limits debit card holder liability for unauthorized purchases.
That creates an extra burden for cardholders.
You have to monitor the transactions on your card because you don’t have automatic protections that come with a regular bank debit card.