The FDIC estimates that about 17 million Americans lack access to a checking or savings account. Further, nearly 20 percent of US households qualify as “underbanked,” which means that they have basic bank accounts but rarely use traditional bank’s financing features. As a result, these people are some of the biggest users of banking alternatives such as check cashing facilities, auto title loans, and prepaid debit and credit cards.
Once reserved for those who could not get a bank account or consumers with minimal income, prepaid cards have since been embraced by people of all income levels. In fact, statistics show that more than a quarter of of prepaid card users earn over $100,000 a year.
Read on to find out how prepaid cards have evolved thus far and how they might continue to change in the coming years.
Benefits and other Payments Made Via Prepaid Cards
Consumers aren’t the only ones who have jumped on the prepaid bandwagon. Because of the convenience these cards offer, many government organizations, including the IRS and the Social Security Administration, are now using them to deliver money to people.
As the United States government continues to phase out the use of paper checks to distribute Social Security benefits, recipients of everything from unemployment to disability now have another way to receive their money—through a prepaid debit card. Not only do these cards provide a more convenient way for people to access funds, but they also offer an inherently safer and more secure method of sending money than mailing out paper checks. As a bonus, prepaid cards are also a more cost-effective solution for often cash-strapped agencies, in part because of the elimination of postage and printing fees. Some experts estimate the cost savings to be approximately 75 percent.
In addition to entitlement programs state and federal tax agencies are also experimenting with prepaid debit cards. The IRS ran a pilot program back in 2011 that offered refund recipients the chance to receive their federal income tax refunds via a government-issued prepaid debit card. Although that program ended, many of America's major tax preparation companies, including H&R Block, provide their customers with debit cards that they can use to receive tax refunds.
More Features and Lower Fees
Prepaid cards’ fee structures have also evolved over time. When prepaid cards first came onto the scene, one of their major drawbacks was the amount of fees that card holders, many of whom were already at a financial disadvantage, had to pay.
Now, however, the fees that prepaid card holders must pay are often less than the fees that many banking customers must contend with. In fact, a 2014 Bankrate survey indicated that only 23 percent of prepaid card issuers charge customers for declined transactions—a stark contrast to the number of banks charging exorbitant insufficient funds fees. The same survey also found that fewer than 20 percent of prepaid card issuers charge customers for making PIN purchases. Further, many prepaid cards offer a variety of ways that card holds can waive many common fees.
These reduced fees have translated into major cost savings for consumers and have significantly improved the reputation of prepaid cards in general. Many card holders now view these cards as a way to manage their funds and maintain a budget. Additionally, with the advent of Technology, these budget-conscious consumers can view their transactions in real time via mobile apps and websites, which puts them in total control of their spending.
Prepaid cards’ fraud protection features have also improved significantly over the years. In 2016, the Consumer Financial Protection Bureau (CFPB) established new rules for prepaid debit cards, giving them the same level of fraud protection that regular credit cards have—as long as the card holder reports the misuse within two days. Moreover, prepaid debit cards also have no direct ties to the holder’s financial institution, so there is no risk of a customer’s bank account being drained if their card is ever lost or stolen.
It's evident that prepaid cards are extremely popular among consumers in every segment of society. Though this is a good sign overall, it's important to note that not all prepaid cards are created equal, so it is still advisable for all consumers, whether they are individuals, businesses, or government entities, to do their due diligence before choosing a specific card.
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