Prepaid debit-card datapoints of the day
Almost everybody interested in extending banking services to the unbanked and underbanked is looking very closely at prepaid debit cards. They can do much of what checking accounts do, without the unpredictable fees, the annoying hours, and the general feeling that if you don’t have a lot of money you’re not welcome.
But now the Philly Fed is out with by far the most detailed research I’ve seen on how people actually use prepaid debit cards, in practice. And sadly for anybody wanting to get into this market, they’re not using them as checking-account replacements.
Using an anonymized dataset covering some 3 million cards and 280 million transactions, the Philly Fed did find that prepaid cards are making significant inroads, especially in poorer areas, as you might expect. Employers, in particular, very much like prepaid cards when their employees don’t have direct deposit: give every employee a single card once, and then just deposit their pay directly onto that card, rather than having to deal with thousands of checks every two weeks. It’s a perfectly sensible way of doing things, and in some counties there is more than one payroll card for every 100 people:
But the lesson of this study is that even if your paycheck is being paid straight onto your card, you’re still not going to use your card like you would a checking account. Most importantly, people just don’t use them for very long: the lifespan of a prepaid card ranges from about 5% to 15% of the lifespan of a typical checking account. If you buy your prepaid card in a shop, you’ll use it for about two months; if you’re given it by an employer, you’re likely to have it for about four months. Which implies that either these jobs tend to be very short-lived, or else that once someone has had a job for four months, they’re likely to get around to opening a bank account.
Or, to put it another way, there’s no evidence here that people are “moving their money” from bank accounts to prepaid debit cards; if anything, it looks like once you start moving decent amounts of money, you graduate from prepaid debit cards to a checking account. Which is probably as it should be, assuming you choose a good bank or credit union which doesn’t rip you off.
If you add up the dollar volume of purchases made on prepaid cards over the card’s lifetime, the sums you get to tend to be very small: the median purchase volume starts at around $25, and peaks around $1,000. That’s not the size of the median purchase, mind: that’s the median size of all purchases on any given card combined.
And when it comes to putting cash onto the cards, or taking it out via an ATM, the transactions tend to be much less frequent than they would be with a checking account, for the very good reason that you generally have to pay for each such transaction. In fact, fees for withdrawing cash from ATMs are the main way that issuers of prepaid cards make money. As a result, prepaid cards, in practice, turn out in this crucial way to be less convenient than a checking account, which always comes with an ATM card you can at least use fee-free at the bank’s own ATMs.
Here’s the chart showing the fees levied by cards used in payroll programs: as you can see, cardholders spend a very substantial amount of money essentially converting their paycheck into cash. Some things you can do with a debit card, but cash still rules. And if you want to be able to move cash around easily, prepaid debit cards are not your friend.
On average, a prepaid card will cost you about $4.88 per month if you have direct deposit, and about $10.72 a month if you don’t: there’s no way to avoid paying substantial fees for putting money onto your card if you don’t have direct deposit. Those numbers are not enormous, but they’re entirely in line with the sums that entry-level checking accounts charge.
The good news, I think, which isn’t in this paper, is that fees are coming down: the rip-off cards are being recognized for what they are, and cheaper, better cards are replacing them. The bad news, however, is that there’s really no indication at all that prepaid debit cards are really being used as checking-account replacements. It’s still possible: maybe the short life of the cards in this study is a function of people switching from bad cards to good cards. But I suspect we’re still a long way from a card issuer where most people hold the same card for years at a time. Unless you count Simple, of course.