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Prepaid cards become increasingly popular

Tim Sloane

As prepaid card services grow in popularity and new consumers enter the market, more banks have chosen to enter and participate in the prepaid debit card industry.

Prepaid cards generally work like a bank-issued debit card, though the funds are not drawn from an account but from the balance remaining on the card. The consumer can add funds to the card at any time.

Tim Sloane, the director of Mercator Research Group, said that prepaid card use will rise to $116.9 billion in 2013 and $167.2 billion in 2014, adding that consumers have driven this increase because “they like the control [prepaid] gives them over budgeting and spending,” according to Las Vegas Review-Journal.

Large banks like U.S. Bancorp, JPMorgan Chase and Wells Fargo have entered the market as they seek to recoup revenue lost as a result of increasing federal financial regulations, especially the Durbin Amendment.

The Durbin Amendment, a provision of the 2010 Dodd-Frank Act, capped the interchange fee charged by banks to merchants when a consumer uses a debit card. The amendment contained an exemption for many prepaid cards, though prepaid cards can accrue some of the highest fees from merchants.

Banks and other payment companies have also turned to prepaid as a means to boost clientele. American Express and PayPal have both introduced their own prepaid cards.

“It’s very much seen as a growth product,” Greg McBride, a senior financial analyst at Bankrate.com, said, the Las Vegas Review-Journal reports. “A lot of banks are getting into the prepaid because of that growth potential.”

Prepaid cards have become increasingly popular particularly among unbanked and under-banked customers, as they are unable or no longer need to maintain a traditional checking account. The FDIC says that nine million American adults are unbanked while 21 million Americans are considered under-banked.

A study by Javelin Strategy & Research revealed that 13 percent of American adults used prepaid products in 2011, a two percent increase from 2010.  The study further revealed that the percentage of Americans who maintain traditional checking accounts fell from 92 percent in 2010 to 88 percent in 2011.

JPMorgan debuted its Chase Liquid prepaid card earlier this year and markets it primarily to those hit hardest by the recent economic decline.

“Our main customer for the Chase Liquid card is a consumer who wants a checking account, but can’t get one,” Gary Kishner, the vice president of media relations at Chase in Los Angeles, said, according to Las Vegas Review-Journal. “It’s a graduation product. A way to show they are responsible before moving on to a traditional checking product.”

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