American Express prepaid card may signal an increase in reloadable card popularity

July 05, 2011

| Money Rates Columnist

Prepaid debit cards, till now primarily used by consumers who don't have a checking account or don't think their credit card application would be approved, may start becoming more common.

At least that's what American Express is hoping after it became the first major financial institution to unveil its own brand of prepaid debit card last month.

An alternative to credit cards

American Express is known for issuing credit cards to well-heeled customers who are willing to pay off their credit card balance every month. But with its new re-loadable, prepaid debit card, American Express is hoping to tap into the phenomenal growth of the prepaid market.

Although prepaid cards look and act like credit cards, there are significant differences: you don't need a bank account, there is no credit check and you aren't extended a line of credit that has to be repaid later. You simply load money onto the card and spend until the money runs out. Even the best credit card rates can't compare to a card that charges no interest.

The cards appeal to the 7 percent of the U.S. population that doesn't use banks--people who don't have checking accounts and savings accounts and don't like to apply for credit or credit cards, with their annual fees, high interest rates and steep penalties.

Prepaid cards can help control spending

The prepaid cards are also good for people whose credit card application has been rejected, don't have access to banks or don't like paying the various fees charged for checking accounts. Some people use the cards as a budgetary device--loading only so much money for, say, groceries as their household budget calls for.

But it's not like these people don't have any money. The Minneapolis Star Tribune reports that these U.S. consumers are expected to put more than $70 billion on their re-loadable prepaid cards this year--a big increase over the $28 billion loaded in 2009.

Advantages of Amex prepaid card

American Express hopes to capture some of that business by offering a card with far fewer fees than many prepaid cards. There is no activation fee, transaction fees or monthly maintenance fee. You're allowed on free ATM withdrawal a month--after that it's $2 per withdrawal.

A major criticism against the prepaid American Express offering is the cost to reload the card. According to Money, while most prepaid debit cards allow free direct deposit, it will cost you $4.95 to reload the Amex card--unless you are transferring funds from a checking account or credit card. People with those types of accounts would be less likely to need a prepaid debit card, however--unless they were using the card to limit their spending.

According to the Star Tribune, we may start seeing more prepaid cards this summer when the Federal Reserve is expected to cap the swipe fees banks charge merchants every time you use your debit card. Those fees amount to billions of dollars a year, and prepaid cards, which haven't been targeted for the swipe fee caps, could be a way for banks to recoup their losses.

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