Reuters Money

Here’s a little bit of personal finance heresy: Maybe you don’t need a checking account at all.

With banks raising fees on basic checking account services, the prepaid card industry is making the case that some consumers, especially students and young adults with uncomplicated finances, may find it cheaper and easier to use a prepaid card to manage their money.

“For basic monthly financial needs, there’s no difference between a checking account and a reloadable prepaid card,” said Michael Flores, the author of a study released Tuesday by the Network Branded Prepaid Card Association (NBPCA). “We see it as a financial products lifecycle. People in their 20s mainly need a transaction account.” Flores is president of Bretton Woods, Inc., the consulting company that performed the study. He said the average prepaid card holder is 27 years old.

Prepaid cards are reloadable cards similar to debit cards. They may be offered through banks or through independent companies. They are growing in popularity as many government benefits are being paid via prepaid card. Some companies are also offering to pay employees through direct transfer to prepaid cards, too.

The study found that people with low balances and thin financial histories pay dearly for transactions, regardless of which way they conduct their finances. If they rely on check-cashing services and pay bills with money orders, they spend between $140 to $720 annually. If they have a basic low-balance checking account, they pay between $218 and $314 a year. If they use a prepaid credit card tied to a direct deposit they pay between $76 and $261, the study found.  Choosing a less expensive prepaid program could thus be cheaper than the bank account.

Not all prepaid cards are bargains, and Consumers Union recently warned about the fees hidden in many prepaid programs. They can contain activation fees, monthly fees, ATM fees, and even fees for checking balances and not using the card. So it’s important to choose the right prepaid card. Here are some considerations:

How will you pay your bills?
“It’s a given that any consumer looking for a prepaid card should make sure it has online bill pay,” suggests Terry Maher, the NBPCA general counsel. If the card is connected to an online bill payment program, you can use it to send a check to your landlord and pay all of your other bills as well.

What if you lose it?
Putting your whole paycheck on a piece of plastic is a little bit scary. Some prepaid cards are actually bank accounts that come with FDIC backing, but not all are. They may not even have the same protections as debit cards, which limit consumer liability to $50 if they are lost or stolen. Prepaid card issuers may have their own cancellation and replacement policies, so ask about that before choosing your card. And make sure you keep a copy of the card number and customer service telephone number in a safe place — next time you are near a copier machine you can make a copy of the card for your files.

How much will it cost you?
The Consumers Union study found a broad range of fees associated with prepaid cards, so shop for one that costs less and that doesn’t charge fees for the kinds of activities you expect to have. For example, if you expect to frequent ATMs, choose a card that doesn’t charge for cash withdrawals. Don’t accept a card that carries an inactivity or cancellation fee.

Is this a stopgap measure?
Many mobile banking solutions are coming down the pike, so the phone-based account may replace the piece of plastic before you know it. Furthermore, while banks are raising fees and balance requirements for traditional checking accounts, they are creating new web-based bare bones accounts that could suit the prepaid card demographic. Most require online transactions and limit ATM access, but they come with FDIC backing.