Prepaid card use rose by about 18 percent in 2011 as consumers dropped traditional banking products such as checking accounts with higher fees, according to a study released today.
About 13 percent of U.S. adults had prepaid cards in 2011 compared with 11 percent in 2010, according to the study by Pleasanton, California-based Javelin Strategy & Research, a market-research firm.
“People used to think of them as cards for people who didn’t have a lot of money, whereas today they’re becoming much more common for a variety of uses and a variety of demographics,” said Beth Robertson, director of payments research for Javelin.
Regulations that have increased the cost of checking and debit products may be partly driving the shift, in addition to consumers choosing prepaid as a budgeting tool, Robertson said.
About 88 percent of consumers had a checking account in 2011, down from 92 percent in 2010, the study found. Consumers with credit cards fell to 67 percent from 74 percent, and those with debit cards dropped to 66 percent from 78 percent.
At the same time, those who hold credit and debit cards are using them more. Consumers spent about 5.7 percent more on their credit cards in March than they did the year before, according to a report from payment processor First Data Corp. Spending on debit transactions in which consumers enter their personal identification numbers was up 14.6 percent and rose 8.4 percent for those in which buyers sign for a purchase.
Visa Inc. and MasterCard Inc., the world’s biggest payments networks, reported higher spending for 2011, compared with the previous year. U.S. credit- and debit-card purchases climbed 9.5 percent to $2.04 trillion at Visa, based in San Francisco, and 11 percent to $901 billion at Purchase, New York-based MasterCard, the companies’ data show. New York-based American Express Co., the biggest U.S. credit-card issuer by purchases, said spending surged 13 percent last year to $542.8 billion.
“Overall spending is continuing to grow, despite the fact that fewer consumers have those cards in their wallets,” Robertson said.
Consumers pay about 21 percent more in fees for basic checking accounts than they did six years ago, and an average consumer may pay about $7.72 a month in a combination of monthly and automated teller machine fees, according to a related Javelin study released in February.
Cost of Regulation
The fees have increased as regulation stemming from the Dodd-Frank Act has curbed other revenue sources. The financial overhaul limited the fees the biggest banks may charge merchants on debit transactions. Together with rules that require banks to obtain consumers’ consent for overdraft protection, that has cost the industry about $12.2 billion annually, according to Javelin.
Some banks may offer prepaid cards to consumers who get rejected when applying for a checking account, Robertson said. BB&T Corp. and U.S. Bancorp offer prepaid cards directly to consumers. About 24 percent of prepaid owners have been offered cards by a bank, according to the study.
“Banks have become a little more sensitive to revenue around the checking account, and so have tightened risk parameters for people’s qualifications to open a checking account,” she said.
BB&T may charge a $10 monthly fee for its prepaid cards that’s reduced to $5 for users who add at least $1,000 to their cards in a month. U.S. Bancorp may charge nothing for cash deposits made at its branches and may charge a $3 monthly fee and $1 to check a card’s balance at a non-U.S. Bancorp ATM.
“When you tally up the total of fees for routine financial transactions you can easily pay more than you would with a low-cost or free checking account,” which consumers may be able to find with credit unions or community banks, said Greg McBride, senior financial analyst for Bankrate.com, a unit of North Palm Beach, Florida-based Bankrate Inc.
Prepaid cardholders on average said they pay about $1.96 to add money to their cards, the study found.
Green Dot Corp., which provides prepaid cards to consumers online and through stores, may charge as much as a $4.95 activation fee for cards purchased through a store, plus $5.95 a month unless cardholders meet certain transaction or other requirements.
Javelin surveyed more than 3,000 U.S. adults online in October.