The booming market for prepaid debit cards is drawing big players, such as JPMorgan Chase and American Express, looking for new revenue streams and niche companies hoping consumers will pay a premium for a card with Justin Bieber’s face on it.
Although some prepaid cards hold a fixed amount of money, like a gift certificate, others operate more like conventional bank accounts. Users can add money by having their paychecks credited to the cards, and can use them to withdraw cash from ATMs. The research firm Mercator Advisory Group found that about 47 percent of U.S. households bought prepaid cards in the 12 months ended in June. The market is projected to reach $1.7 billion in fee revenue for financial institutions by 2016, according to Madeline Aufseeser, a senior analyst with the Boston-based consulting firm Aite Group. She says Americans could have $168 billion loaded on the cards by then. “The market for prepaid debit cards and payroll card products continues to grow at lightning speed,” she says.
It’s also regulated by patchwork. While the federal Consumer Financial Protection Bureau has been reviewing the prepaid market since May, for now many cards are exempt from federal limits on debit card swipe fees charged to merchants and can charge cardholders whatever they like. Cardholder usage fees typically start at about $5 a month, says Lauren Saunders, an attorney at the National Consumer Law Center. Chase Liquid, which made its debut in July, costs $4.95 a month and simulates checking. “We are leveraging assets, such as our ATM and branch network, that other players in the market don’t have,” says JPMorgan consumer banking executive Jonathan Wilk. AmEx launched its Bluebird card, sold at Walmart stores, in October. The card is free for direct-deposit users, as AmEx makes its money from merchants, via swipe fees.
In October, Eric Dresdale, a recovering alcoholic and prescription drug abuser, launched a card that can’t be used at liquor stores, bars, escort services, casinos, or tattoo parlors—or to get cash. Dresdale says the features justify the Highland Beach (Fla.)-based Next Step Network’s $14.95 monthly fee, plus a 50-cent “consequence fee” for trying to violate restrictions. The tough love approach has attracted about 40 people so far, Dresdale says.
Other companies, such as San Diego-based BillMyParents, which has hired Bieber as its pitchman, are picking their targets carefully. “We’re not trying to boil the ocean,” says BillMyParents Chief Executive Officer Michael McCoy, previously president of credit cards at Wells Fargo. “We’re very focused on our demographic.” McCoy says research convinced him Bieber will sell better than celebrities attached to earlier panned cards, including personal-finance guru Suze Orman and reality television’s Kardashian sisters.
Consumers have reason to be cautious, says attorney Saunders. Her watchdog group is pushing the CFPB to set clear guidelines for the prepaid debit market and to require all issuers to keep cardholder money in banks backed by the Federal Deposit Insurance Corp., both to protect the funds and provide oversight. “If the funds are not held in a bank account,” she says, “then there is no bank regulator doing safety and soundness regulation.”