Time to Invest in a Prepaid Card?

04/17/2012 4:00 am EST

Focus: MONEY MANAGEMENT

The backlash against big-bank checking accounts has produced an interesting alternative, writes Odysseas Papadimitriou, CEO of Card Hub, a leading online marketplace for credit card offers, prepaid debit cards, and discounted gift cards.

Suze Orman, Lil’ Wayne, George Lopez, and Dick Durbin? Believe it or not, that last name might have a bigger effect on the prepaid card market than the three others—who all have made headlines as prepaid card endorsers in recent months—combined.

Durbin, as most of you know, is a US Senator from Illinois. He’s also one of the main reasons why checking account fees are going up and prepaid cards are gradually becoming a common part of our personal finance discourse.

The Durbin Amendment to the Wall Street Reform and Consumer Protection Act directed the Federal Reserve to cap the fees banks with at least $10 billion in assets could charge merchants whenever debit cards are swiped at their stores. The thinking was that this would relieve some of the economic pressure on our small business community, and in doing so lead to lower prices for consumers.

The practical effect, however, has been much different. After months of public debate and millions of lobbying dollars spent, the Federal Reserve finally placed a roughly 24-cents-per-transaction limit on these so-called swipe fees. This, of course, spelled a significant revenue cut for big banks—roughly $9.4 billion annually, according to Card Hub data—which they would not take lying down.

Banks around the country began to cut debit-card rewards programs and float the idea of adding monthly fees to checking accounts. Some applied them on an experimental basis, while others adopted them on a larger scale, often tying them to actual debit card use or account balances.

For consumers used to free checking, this meant that it was time to voice displeasure over the changes, and also to look for cheaper alternatives. Two natural options awaited: small-bank checking accounts, which did not have the same revenue constraints as their large-bank counterparts, and prepaid cards—also unregulated, and able to provide the same utility as a checking account, obviously minus the paper check writing.

While prepaid cards were already the fastest-growing form of electronic payment, according to Fed data, this new legislation has undoubtedly given the companies that issue these cards a significant boost. According to the Mercator Advisory Group, a research firm that puts out a trio of prepaid card market studies each year, people will load around 6% more onto prepaid cards in 2012 than they did in 2011, and roughly 27% more by 2014.

The rise of the prepaid card is also evidenced by the very names mentioned before Durbin, way back at the beginning of this article. The sudden involvement of a wave of celebrity endorsers surely is a sign that prepaid cards are on an upward trend, because neither the money nor the interest would be there otherwise.

In light of all this, you may want to either invest in a prepaid card issuer or invest in a prepaid card for daily use. If you choose the latter, it’s important to get the right card for your needs.

According to Card Hub’s Prepaid Card Report, the Green Dot Prepaid Card and the American Express Prepaid Card are best suited to a prepaid card’s two primary applications—as a replacement checking account and a financial literacy teaching tool, respectively.

Odysseas Papadimitriou is CEO of the credit card comparison Web site CardHub.com.