Recent statistics estimate that about 20 percent of Americans are underbanked, which means that they don’t have access to a checking account—and this number is growing. According to the Federal Reserve Bank of Boston, costly bank overdraft fees and sub-par customer service have caused many consumers to ditch their bank accounts entirely in favor of using prepaid cards. In 2015, individuals loaded $100 billion onto prepaid debit cards.
Prepaid debit cards offer a number of unique advantages to consumers. For example, customers can purchase and reload them at a variety of convenient locations, including online. These cards are also great way for parents to manage the money they give to their teens or college students, mostly because prepaid cards don’t carry the same risks that credit cards do.
Read on to learn about the most common reasons that consumers are making the switch from banks to prepaid cards.
1. Overdraft Fees Are Virtually Obsolete with Prepaid Cards
One of the main reasons consumers are leaving traditional bank accounts behind has to do with the excessive fees, particularly overdraft fees, that banks charge. Over the past few decades, banks have been steadily finding more and more ways to make money from their customers. It began with banks eliminating free checking accounts. Next, they hit consumers with monthly fees for everything from account maintenance to ATM withdrawals.
In addition, many banks increased their overdraft fees and began charging added fees for customers who overdrew their accounts for a certain number of days in a row. Bank customers, especially young and less financially well-off ones, found themselves burdened with overdraft fees averaging $35, even for minor purchases. In fact, only a few years ago, big banks like Wells Fargo and Bank of America were so blatantly manipulating their transactions to generate fees that a federal judge ordered them to pay restitution to their customers.
Critics of prepaid cards continue to state how maintaining a checking account is more affordable than relying on prepaid cards, but due to typical bank fees, this is often not the case. At its essence, the overdraft fee is similar to the interest rate on a loan, except that overdrafts often amount to much more than loan interest ever could. In fact, research shows that when compared to borrowing around $100 for 30 days, bank overdraft fees would be over seven times higher than the maximum interest a payday lender is allowed to charge.
With most prepaid cards, consumers never have to worry about overdrawing or spending money they don’t have. They also have the peace of mind of knowing exactly how much money they have available, unlike checking accounts that display an available balance that might not tell the entire story. Using a prepaid debit card eliminates the element of surprise that banks are developing a reputation for. Moreover, prepaid cards state their fees upfront, thus making it easy for consumers to shop around and find the card that best suits their budgetary needs.
Most unbanked individuals who have opted to use prepaid cards report high levels of satisfaction with their choices. In a survey conducted by Herbst-Murphy and Weed, nearly half of Millennial respondents believed that a prepaid card is the best alternative to a checking account.
2. Prepaid Cards Accept Direct Deposits.
Prepaid debit cards give customers many of the same benefits that come with checking accounts provide, including direct deposit. Employees who opt to receive their pay via prepaid debit card can access their funds sooner, eliminate the need to carry cash, and can avoid any reloading fees.
Using a prepaid card for this service is preferable to using a checking account because, although most banks will waive fees with a direct deposit amount over a certain threshold, some consumers have trouble meeting this threshold and end up paying even more fees for account maintenance. However, many prepaid card issuers offer free direct deposits regardless of the amount.
While prepaid cards can certainly be a cheaper alternative to checking accounts and credit cards, there are still some associated fees. For this reason, it’s important to thoroughly research any card before signing up for it. Always visit the prepaid card issuer’s website to see read the company’s terms and conditions. It’s also a good idea to read online reviews to get honest feedback about which prepaid cards are best.
Prepaid cards are no longer just for those who can’t maintain a bank account, these cards have infiltrated nearly every part of society and the prepaid debit card popularity is only expected to increase. As technology evolves, we should expect to see people using prepaid cards in new and exciting ways.
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