Chris Espinoza was having a hard time making purchases or paying bills online because he didn’t have a bank account.
“Nobody wanted to give me an account,” said Espinoza, now 31. The La Habra, Calif., resident explained that being financially reckless during his youth “messed me up.”
“Doing everything with cash was hard,” he said.
During a visit to Wal-Mart about a year ago, Espinoza found his banking work-around in the Bluebird prepaid card. Offered by the mega-retailer and American Express – it allows users to function as though they have a bank account, providing services through its mobile app such as direct deposit, online bill pay and check deposits.
Espinoza was not alone in his banking woes. According to the Federal Deposit Insurance Corp., more than a quarter of U.S. households either do not have traditional bank accounts or they do but use alternative financial services anyway.
Many people are turning to general-purpose reloadable prepaid cards, which function like debit cards, minus the checking account. The cards can be used to withdraw cash at ATMs and for purchases online and at retail cash registers. Sold at retailers, banks and online outlets, the cards are branded with a payment network logo, such as American Express or Visa, and can be used wherever that brand is accepted.
In some cases, these cards offer lower and fewer fees than basic checking accounts, according to a recent report by the Pew Charitable Trusts. But consumers can incur incremental fees for buying certain cards, loading them with money or even not using them.
Prepaid cards have enjoyed some of the biggest growth in servicing the so-called financially underserved in recent years.
Products aimed at that market generated $89 billion in fees and interest domestically in 2012, according to the Center for Financial Services Innovation. It found that general-purpose reloadable prepaid cards captured $1.6 billion in revenue that year, a 28.5 percent increase over 2011. Additionally, consumers loaded more than $64 billion onto these cards in 2012, according to the Mercator Advisory Group.
All that money has the U.S. Postal Service eyeing the prepaid card market. The cash-strapped agency released a report in January proposing its branches provide non-bank financial services including reloadable prepaid cards to its customers.
How did the underserved marketplace become so big?
“There are a number of forces at work,” said Christina Tetreault, staff attorney at Consumers Union, the policy and action division of Consumer Reports. She cited fallout from the financial crisis that tarnished some consumers’ credit to the point they no longer qualified for credit cards and bank accounts.
“Another piece is the innovation going on, and a lot of the products are more versatile than a traditional bank account,” Tetreault said.
“The underserved market is huge, and unfortunately poor people have had to spend a lot of money for banking-like services,” she added. “But now with increased competition, the cost to consumers is coming down.”
Building better habits
Some of the Bluebird card’s features seem to encourage responsible financial management. For example:• The card allows users to designate funds for savings by funneling them into a linked “SetAside Account” – a kind of buffer against unintentional spending. Tetreault said there is some evidence people are using such linked tools for budgeting.
• Another feature is Bluebird checks – a stack of paper checks that cardholders can order for a fee – roughly 50 cents per check. Users must preauthorize each check online or with the card’s mobile app to avoid an overdraft. Tetreault compared the 50-cent check with a money order, which at the post office costs $1.20, the lowest price available. Added to that is the time saved by skipping a trip to the post office.
• Bluebird also has online bill pay, which allows users to pay individuals and merchants with checks and electronic payments sent through their account or the app.
Mobile-phone providers also are offering prepaid cards with payment management apps. Sprint’s Boost Mobile debuted its Mobile Wallet last spring, and T-Mobile unveiled Mobile Money last month.
This is an emerging trend, according to Adam Rust, research director for consumer advocacy group Reinvestment Partners. “Companies like T-Mobile that have an existing customer base and a limited financial relationship with them basically collect one payment a month,” Rust said. “But they can use this prepaid card as a cross subsidy to enhance their main business.”
A critical caveat to prepaid cards is that consumer protections haven’t kept pace with all the innovation, Tetreault said.
“We’d like to see mandatory FDIC insurance for all prepaid card accounts and the same protections against fraud and loss that apply to debit and credit cards,” she said. For now those protections are provided voluntarily for prepaid cards – but not by law.
With FDIC insurance, prepaid cards are eligible to receive federal benefits like Social Security payments. Consumers also benefit because their money is safe if the company goes out of business.
Comparison shopping prepaid cards also can be difficult due to a lack of uniform disclosures. And some fee breakdowns are very complex – a problem throughout the alternative financial services sector, Rust said.
“There are so many different kinds of fees for a consumer it becomes really hard to know how much you’re likely to spend, especially if you get a pay-as-you-go card,” Rust said.
Chris Espinoza likes that his Bluebird card doesn’t have many fees and continues to use it even though he now has a checking and savings account. “I still use it for online purchases, eBay, online bills, stuff like one-time purchases.”
Indeed, almost half of households without bank accounts that have used a prepaid card say they’re likely to open an account in the future.
“They don’t have to be a dead end,” Rust said.