It’s interesting to see that prepaid debit is now much more mainstream. The Boston Globe recently had an article on finance options for college students and parents.

Parents of college-bound students, take comfort. It should be harder for them to run into trouble with credit cards. Anyone under 21 now needs a cosigner to get an account.

The article then goes on to describe the advantages and disadvantages of debit, credit and prepaid debit cards.

A credit card helps a kid build a credit history. But remember, if you cosigned for it and your child defaults, the black mark will appear on credit score as well. So definitely be sure your kid is responsible enough before choosing this option. American Express has a nice feature where you can login to their website and edit the credit limit of the card.

If you go with a basic debit card, you should seriously consider opting out of “overdraft protection.” Fees can run up to $35 per charge. It can be easy to rack up hundreds in fees accidentally because of this.

Lastly, they mention prepaid debit cards as an option! The Boston Globe notes that they typically have a wide range of fees and don’t offer the same protection as other types of cards.

Pretty good article.

The Wall Street Journal covered the marketing of prepaid debit cards on college campuses. I liked this article more than the previously cited New York Times because it is fairly balanced. The WSJ article covered both the negatives (such as the fees and the fact that a credit history is not being built) and positives.

Many universities have banned the marketing of credit cards on their campuses. Prepaid debit cards are filling in the gap. While the fees might be high, at least students will not be graduating with high interest credit card debt (according to the article nearly one in four students graduate with more than $5,000 in debt.) Also, providers are innovating to better serve customers. Walmart’s Student Money card (powered by GE MoneyBank) issues two cards: one to the student and one to the parent. The parent can monitor spending and add money if need be.

This is another example of prepaid debit cards filling in an unfulfilled need in the marketplace. Yes, fees are high compared to other financial products. But after overdraft and minimum balance fees, a “free” bank account is in fact quite expensive. Students often hit by overdraft fees  because they have low income.

The prepaid debit market is rapidly expanding. Now that the market is worth hundreds of billions of dollars, the industry has attracted attention from the media. Much of the coverage is negative.

A New York Times article titled “Prepaid, but Not Prepared for Debit Card Fees“is a good sample of the media’s opinion of the prepaid debit industry. As you can probably guess, the article is mainly focused on how fees are very high. The fees of a MiCash Prepaid Mastercard is detailed early on, which has a $9.95 activation fee, a $1.75 ATM withdrawal fee, $1 for a balance inquiry, 50 cents for each purchase, $4 for monthly maintenance, $2 for inactivity after 2 months and a $1 charge to call customer service. The article then goes into several horror stories of people loosing a great deal of money due to these miscellaneous fees.

To the typical upper-middle class reader of the New York Times, these charges seem like highway robbery. A banking account would seem much cheaper by comparison.  This is completely unfounded however.

To the “underbanked” (many who are minorities or make less than $30,000/year), prepaid debit actually represents a good deal because traditional banking for them is expensive. This means not only monthly account fees for low balances but also overdraft fees. According to a study by Bretton Woods, a consumer switching to a prepaid debit card can save between $96 and $146 annually.

So even after the “nickle and diming”, prepaid debit saves the consumer money.

Lastly, I have a few beefs I want to point out. MiCash is not a good example because it  is one of the most expensive prepaid debit products ($50.30 for first two months of typical use, versus for $38.13 for a Wal-mart).  And according to the rate page on their website, they no longer charge to contact customer service.

Secondly, this is a nascent market. Prices are often high in new and unestablished markets. Prices will fall in time. The article does point out at the end that price-cutting from Walmart had provoked a round of fee-cutting from other competitors.

David Long,  a stock analyst covering Master Card and Visa, says that the increasing use of prepaid debit cards will increase profits.  The cards do not require a credit check, so consumers who cannot usually get a regular credit card can use them to reserve things like hotel rooms and rental cars. The market is expected to grow 22% annually over the next 3 years.  Total dollars loaded onto prepaid debit is expected to increase from $291 billion in 2009 to $526 billion in 2012. Mastercard and Visa are the two companies expected to benefit most from this growth.  – AP R4GD9PXP9MZP