Prepaid Cards Coming to Wall Street

A few months back I wrote a post about prepaid cards available from Wal-Mart and a company called Green Dot (see my post of March 18, Anti-poverty Infrastructure at Wal-Mart?). Apparently, this is very a good business. Green Dot is going public this week and Wal-Mart has been allocated 36% of the offering as an incentive to promote the Green Dot’s cards to its customers.

At the same time Visa has launched a campaign touting the benefits of prepaid cards for the financially underserved. “Core to this campaign is Visa’s ability to reach consumers who may not realize they can enjoy the benefits of a Visa product, and experience a better alternative to a cash-and-carry lifestyle” said Hyung Choi, head of Visa’s prepaid products in the United States. Sounds very good. However, Visa doesn’t offer cards directly, their “partners” do. And who are these partners? Many are the same pay-day lenders and check cashing companies who make a living enabling the “cash-and-carry lifestyle” for which Visa claims to be providing an alternative.

Are these prepaid cards really good for the poor? Where are all the big banks in this scramble for the business of those at the lower end of the economic spectrum? If the likes of Green Dot, Wal-Mart, Western Union can make money serving the poor why not main street commercial banks whose scale of operations would make it possible to offer less expensive products?

The banks of course were already making lots of money off the poor from overdraft charges and high interest on credit cards. In fact, a recent study showed how even pay day loans can be less expensive than overdraft fees. The financial services reform legislation just passed by the Congress will make it more difficult for banks to reap these benefits so expect other banking fees to go up. (See my post of June 17, Changes in Bank Regulations Will Impact the Poor.)

So, what is the best option for those with fewer financial resources? While the prepaid product is no panacea, it is clearly safer than cash. If properly managed, the prepaid card can be more economical than a traditional bank account. To make the product work most effectively deposits should be made directly from employers or government payers such as social security. Cash “reloads” should be for the maximum amount and as infrequent as possible to reduce the impact of the reload fee.

Cash withdrawals should be similarly as large and infrequent as possible to minimize ATM fees. Many prepaid cards also have transaction fees for making purchases with the card so these too should be limited and only for high value amounts such as the weekly shopping bill at the supermarket. Using these cards for small purchases such as snack food should be avoided at all times.

A prepaid card will only allow one to spend what has been deposited to the card so it is critical to have a budget and keep track of how much is being spent. Many providers are eagerly waiting for the moment the card owner wants to make a purchase and there is insufficient money on the card. That’s when the seductive loan offers will come and card holder will find himself taking out a loan that is every bit as costly as the traditional payday or car loan. If the prepaid card helps instill the discipline to live within one’s means it will be a benefit to the poor. If it is just a back door the same old predatory lending products it will do more harm than good. The Wall Street investor on the other hand will probably make out just fine.