Why prepaid cards may be the future of banking
How much do you pay per year in banking fees? Many free bank accounts actually come with additional ‘stealth charges’ including returned item fees, overdraft fees or fees for not crediting the account with enough money each month. Furthermore, many British banks are introducing current accounts with monthly fees, meaning the cost of banking is likely to increase.
In the USA, prepaid cards are increasingly being seen as an alternative to increasingly expensive bank accounts. Prepaid cards like the Pockit Card work a lot like standard debit cards; money can be loaded on in a variety of ways and spent at stores or to withdraw cash from ATMs. However, they are not connected to a bank account, meaning no expensive overdraft or credit facility. As a result, prepaid cards are rapidly gaining popularity in the US as a cheaper and easier to use alternative to a bank account. In 2008, $19.5 billion was loaded onto reloadable cards. Last year the amount was $57 billion, but by 2014 that figure is expected to reach as high as $160 billion.
But why are prepaid cards becoming so popular in America? One reason is down to the expense of maintaining a bank account. On top of overdraft fees, many US banks require customers to maintain a minimum balance, which penalises customers who are unable to save money at the end of each month. This practice is similar to one in the UK, where some banks charge more for an account if the customer doesn’t transfer a certain amount to it each month.
Another reason is the restrictive nature of traditional banking. People with poor credit histories are less likely to be accepted to open a bank account. By contrast, prepaid cards do not require a credit check, meaning everyone who applies for a card will receive one.
Here in the UK, it’s likely a similar trend in moving away from traditional banking methods will emerge. Already, many banks including Halifax, HSBC, Natwest and Lloyds TSB offer current accounts with monthly fees of around £8 to £25 per month. The Treasury Select Committee has recently announced it supports banks charging monthly fees on banking, meaning traditional ‘free’ current accounts are likely to be phased out as banks try to remain competitive.
What does this mean for consumers? Currently, many people are able to avoid banking fees by not going into their overdraft and transferring enough money to their account each month. However, if free accounts were phased out, these people would be hit with monthly fees.
Just like in the US, prepaid cards are likely to become a mainstream alternative to a current account in the UK because they have transparent fees, are cheap to use and available to everyone. The Pockit Prepaid Card for example, is available either as pay as you go with no monthly fees and low transaction costs, or as pay monthly, which costs just £3 per month and no transaction fees, which is a lot less than the pay monthly bank accounts currently available. Uniquely among prepaid cards, Pockit allows its cardholders to get discounts on utilities, broadband and insurance as well as discount codes. Pockit Pay Monthly cardholders can also earn up to 10% cashback on their purchases, meaning the £3 monthly fee can be earned back many times over each month.