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October 28, 2009updated 04 Apr 2017 1:12pm

An argument for prepaid?

At a time when prepaid cards are struggling for mass market adoption in markets such as the UK, a new study has said that, for low income segments, prepaid may be a cheaper way to bank in the US. The average US consumer can make a saving of over $100 per year by making use of prepaid cards with direct deposits rather than a basic bank checking account, according to a new study from US banking consultancy Bretton Woods. A comparison of checking accounts at four leading US banks Bank of America, Wells Fargo, JPMorgan Chase and Citigroup with popular prepaid cards such as Green Dot VisaMC and AccountNow Visa found that the average bank customer paid between $204 and $353 annually for a basic checking account with usage patterns akin to those seen for branded prepaid cards.

By Dan Jones

At a time when prepaid cards are struggling for mass market adoption in markets such as the UK, a new study has said that, for low income segments, prepaid may be a cheaper way to bank in the US.

The average US consumer can make a saving of over $100 per year by making use of prepaid cards with direct deposits rather than a basic bank checking account, according to a new study from US banking consultancy Bretton Woods.

A comparison of checking accounts at four leading US banks – Bank of America, Wells Fargo, JPMorgan Chase and Citigroup – with popular prepaid cards such as Green Dot Visa/MC and AccountNow Visa found that the average bank customer paid between $204 and $353 annually for a basic checking account with usage patterns akin to those seen for branded prepaid cards.

Those costs, which included a “conservative” estimate of six overdraft fees per year as well as ATM fees and minimum balance fees, compared with an annual average of between $215 and $320 incurred by active users of branded prepaid cards, with consumers who opted for a prepaid card with a direct deposit facility paying between $108 and $207 per year.

The report noted, however, that the costs “are basic to cover recurring monthly expenses and cash needs… there are a multitude of other services a consumer could use that would increase costs for both bank and prepaid card accounts”.

Customers who do not have access to either basic banking accounts or prepaid cards, and are forced to use a variety of systems such as check cashing services, purchasing money orders and bill payment fees, pay an annual average of between $167 and $312 in fees, the report added.

The study, Payment Systems Evolution and Branded Prepaid Card Analysis, also moved to dispel what the authors feel are preconceptions over the use of prepaid cards.

Responding to suggestions that common pricing schemes should be introduced in order to simplify fee structures across the prepaid industry, Michael Flores, author and Bretton Woods CEO, said that “suppliers who offer unique pricing options benefit consumers”, citing the mobile telecoms industry’s own divergent pricing policies as a case in point.

While inactivity and dormancy fees are necessary in some cases, other charges were less severe than those commonly employed by the banking industry.

Flores added: “Overdrafts with prepaid cards are the exception, not the rule. Most reloadable prepaid cards do not allow overdrafts. For those that offer this option, it is an affirmative ‘opt in’ service and the fees tend to be less than bank overdraft fees”.

From a security standpoint, and contrary to prepaid cards’ reputation as a riskier product, the study noted that the financial services industry has already pointed out the advantages inherent in the system – transactions that are traceable and trackable, and that can be cancelled with funds frozen at any time. These services mean “it is not clear that prepaid cards are any more risky than other card products such as credit and debit cards”.

Further, the report said, new US Treasury regulations which could increase prepaid card anti-money laundering reporting requirements will be imposed against a backdrop of an industry which has already adopted a number of best practices.

These include anonymous network branded cards, unavailable for sale to the public in amounts over $1,000, being unable to be reloaded or used at ATMs.

An increasing shift away from cash transactions – projected to fall to 15 percent of total payments in 2012 from a 2007 level of 20 percent – will also benefit the prepaid market, which is suited to smaller payments. Figures cited by the study estimate that average transaction amounts for credit, debit and prepaid cards will stand at $85, $43 and $36 respectively by 2012.

Banking fees

US – average cost of payment methods to consumers

 

Low usage

High usage

Prepaid card

$0-$215

$215-$320

Prepaid card with direct deposit

$0-$108

$108-$207

Basic bank current account

$0-$204

$204-$353

Cash

$0-$167

$167-$313

Source: Bretton Woods

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