Consumers nervous about debt now are using debit cards more than credit cards, and that trend may continue as people become more aware of the costs of credit cards.
Many consumers – including parents of college students who can no longer obtain credit cards without a cosigner, people with poor credit or those who don’t manage their credit well, and the estimated 9 million Americans who don’t have bank accounts – will choose a new kind of plastic, the prepaid debit card.
Consumers already are employing prepaid cards for such specialized uses as cell phone charges, and the U.S. Treasury has just announced a pilot program to download income tax refunds to prepaid debit cards.
Generally, prepaid debit card issuers charge monthly fees, as well as fees for cash withdrawals from ATM machines. The cards are not linked to a bank, and the user doesn’t have a PIN number. There are no overdraft fees because when the money is all used up, the card doesn’t work.
Products like the NetSpend MasterCard Prepaid Card and the UPside Visa Prepaid Card offer many of the conveniences of a bank account, including online bill pay, transfer options, printed checks, and companion cards. The well established Visa Payroll Card, a product designed for businesses for which many large banks and ADP are solution providers, allows employers to pay all of their employees by direct deposit, including those who do not have bank accounts.
Setting up prepaid debit cards
Anyone can qualify for one of these cards. Applying for the cards online is easy. No credit check or bank account is required, although the government requires applicants to provide forms of identification such as a Social Security number, driver's license, passport, or alien registration when new cardholders activate their cards. Cardholders may set up direct deposit account numbers to give to employers or the federal government for electronic deposit of wages or government benefits like Social Security.
Electronic deposits generally are free. NetSpend MasterCard Prepaid cardholders can make cash or check deposits through retail locations like Western Union and pay a fee. Inter National Bank and MetaBank, members of the FDIC, service the NetSpend cards.
UPside Visa Prepaid Cardcardholders can set their own limits. Each month, they can load up to $10,000 through direct deposit to the UPside Visa and $5,000 in cash through the GreenDot MoneyPak network. GreenDot MoneyPaks are sold at 50,000 retailers nationwide, including Wal-Mart, CVS, and Walgreens. The UPside Visa Prepaid Card is issued by MetaBank.
The Treasury Department’s plan to pilot the use of prepaid debit cards for income tax refunds is part of an effort to speed up payment of tax refunds to unbanked taxpayers and possibly cut down on the use of expensive refund anticipation loans and check cashing services, the Treasury Department stated in its announcement.
The pilot is targeted to certain low- and moderate-income individuals who will be given the opportunity to sign up for new accounts with debit card access at tax time. It also will test offering accounts that can be used year-round to deposit other sources of income, store money, make purchases, pay bills, withdraw cash, and build savings.
The program is expected to launch during next year's tax return filing season. The Treasury will reach out to eligible taxpayers in early 2011.
Payroll cards and new uses for plastic
Visa Payroll Cards, which large banks and ADP market under their own names to employers who want to eliminate all cash and paper payments to employees, are linked to the employer’s account. Pay is downloaded to the employee’s card by direct deposit. Pay is on time and the card is designed to reduce the costs associated with check printing, processing, and delivery services. JPMorgan Chase is both the transaction processor and card-issuing financial institution for its prepaid payroll cards.
Banks and card companies are coming up with all kinds of uses for prepaid debit cards. Among its many prepaid card options, Chase offers a rebate card that companies can give to customers, as well as a card for students: the Chase University Card or Chase College Card. Schools can disburse financial aid refunds, grants, work-study payments, athletic stipends, and payroll electronically to an entire college audience who can then use these cards as debit cards.
One of Visa’s new offerings is a prepaid health care card. Visa claims that the card encourages increased employee participation and satisfaction in company health care programs, and helps to reduce administrative expenses. Health care cards can supplement tax advantaged health care savings programs and make administration of these programs easier.