By: Sandra Block
June 20, 2011
American Express, a company typically associated with people who have Roman numerals after their names and use "summer" as a verb, did something surprising last week: It introduced a prepaid card.
Prepaid cards are re-loadable cards that can be used anywhere credit or debit cards are accepted. They're popular with people who can't afford a traditional bank account, or who have been turned off by overdraft fees and other costs. They also offer a way for consumers who don't have credit cards to shop online. That's not the type of person you usually see in American Express ads. But the market for prepaid cards has grown so large that big financial companies can't afford to ignore it.
American Express says its prepaid card is a cut above the rest. There are no activation fees, and it's free if you buy it online. Also, the card gives users access to American Express perks, such as roadside assistance, coverage for theft or damages of card purchases and trip-planning services.
Prepaid vs. debit
More than 17 million Americans don't have bank accounts, and that number could grow as checking accounts become more expensive. The broad financial reform bill Congress enacted last year required the Federal Reserve to place "reasonable" limits on the fees banks charge retailers every time a consumer swipes a debit card. That rule is scheduled to take effect July 21. To make up for the loss of billions of dollars in swipe fee revenue, many banks and credit unions are adding fees for services that used to be free.
Before long, "free checking may be a thing of the past," says Bill Hardekopf, chief executive of LowCards.com.
Prepaid cards offer "unbanked" consumers a safer and less expensive alternative to check-cashing stores and pawnshops, prepaid card issuers say. Many prepaid issuers allow card holders to have their paychecks direct-deposited to their cards. Card holders can also use the cards to pay bills.
Still, prepaid cards have plenty of detractors. Consumer groups say many of the cards are loaded with activation, reloading, maintenance and other fees that can quickly erode the card balance. In May, Florida Attorney General Pam Bondi announced that she was investigating five large prepaid card companies for possible unfair and deceptive practices.
Compared with other prepaid cards, the American Express version "is definitely an improvement in that the number of fees has been drastically whittled down," says Michelle Jun, an attorney for Consumers Union.
But even a consumer-friendly card like the one introduced by American Express lacks the advantages of a checking account, says Tim Chen, a former hedge fund analyst and chief executive of NerdWallet.com, a credit card comparison website. Some potential drawbacks:
•Reloading fees. To add cash to your American Express card, you'll need a Green Dot MoneyPak, which you buy for $4.95 at a retail or drug store, then reload your card online or by phone.
Users can load their cards for free from a bank or checking account, but if you have a bank account you probably don't need a prepaid card, Chen says. American Express says it plans to add a direct-deposit feature sometime in the future.
•Withdrawal costs. Most bank and checking accounts allow free ATM withdrawals from their network, and some allow it for out-of-network ATMs, too. American Express prepaid card holders get one free ATM withdrawal a month; after that, they're charged $2 for every withdrawal.
•Lack of consumer protections. Federal law protects you from liability if someone steals your credit or debit card and embarks on a spending spree. Those protections don't apply to prepaid cards, Jun says. While most prepaid card issuers, including American Express, provide "zero liability," that protection is voluntary, Jun says.
•Limited use. American Express says its prepaid card can be used anywhere that accepts American Express. Trouble is, a lot of small retailers don't accept American Express because it has higher transaction fees than other card issuers.
Consumers can still find free checking accounts with no minimum balance requirements, particularly if they're willing to bank online. Chen says.
Even some major banks continue to offer free checking with no minimum, along with many credit unions, Chen says. Even after July 21, he adds, "there will be options out there."
Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays. E-mail her at: firstname.lastname@example.org. Follow on Twitter: www.twitter.com/sandyblock