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Banks target the 'unbanked' with prepaid cards

November 09, 2012

| Money Rates Columnist

If you're unhappy with your checking account -- or perhaps haven't had an account for a while -- your bank may have an alternative for you.

A study released this week indicates that banks are increasingly interested in offering prepaid cards. The study, which was commissioned by the American Bankers Association and conducted by Mercator Advisory Group, finds most banks either currently offer the cards or have plans to do so.

This rising interest in prepaid cards signals that banks may view these products as an emerging alternative to traditional checking accounts -- particularly for consumers who have previously been squeezed out of banking.

Prepaid cards offer a new alternative

The survey asked banks about their perceptions and plans for a number of prepaid card options, including general purpose reloadable cards, payroll cards, student cards and gift cards.

Prepaid gift cards were the most popular of these options with banks, with 58 percent of those surveyed offering or planning to offer these cards. However, general purpose reloadable cards, which are often used as an alternative to checking accounts, were a close second. Fifty-two percent of the banks surveyed said they offer or plan to offer this type of card.

The ability to attract new customers, as well as offer additional products to existing customers, were the main motivations given by banks for offering prepaid cards. In particular, it appears banks may be interested in attracting "unbanked" consumers -- those who currently have no bank account.

Many unbanked customers find traditional accounts too costly or complex to maintain. But the simple nature of prepaid cards may allow banks to extend improved financial privileges to consumers who have previously relied on alternative financial options, such as money orders and check-cashing services.

Seeking new and former customers

About a third of banks offering or planning to offer general purpose reloadable cards said they wanted to create an account type that would target low- to moderate-income consumers. A third also reported they wanted to provide a new account type for their existing customers. These customers may include those who struggle with overdraft fees or fail to maintain an account balance sufficient to avoid monthly maintenance charges.

Although a significant number of banks still do not offer prepaid cards, that number may change as more financial institutions explore this option. According to the study, the more banks had investigated prepaid cards, the more likely they were to report satisfaction with them.

As banks look to tap into the market of unbanked consumers, as well as provide flexible payment options to current customers, prepaid cards may offer an attractive option for consumers and institutions alike. The result may be more prepaid cards coming to a bank near you.

Whether these cards appeal to you, however, may relate to how happy you are with your checking account. If you are diligent in maintaining your financial records and value the perks of a good checking account, the lure of the prepaid card may be lost on you.

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