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Call them the “unbanked” - over 44 million Americans don’t have a bank account, and about 73 million don’t have access to any bank services, according to The New York Times. For these mostly low-income consumers, one potentially useful option is a “prepaid” cash card, to buy everything from groceries to prescription drugs. It’s a big market, and continuing to get much bigger.
That has led to a significant bull market for prepaid cash cards. According to the Mercator Advisory Group, prepaid cash card volume was over $4 billion in 2008, and it’s estimated to reach $10.8 billion in 2010.
The concept behind prepaid cash cards is simple. You buy a prepaid card, usually from a retailer, but also from a major credit card carrier or bank, load it with cash, and then use it like a debit card. In other words, it’s good until the cash deposited on the card runs out.
Prepaid cards are increasingly being offered mainly by mega-retailers like Wal-Mart (Stock Quote: WMT), Walgreen’s (Stock Quote: WAG), and Win-Dixie (Stock Quote: WINN) supermarkets, and often come with a major card carrier backing it. (MasterCard (Stock Quote: MA) and Visa (Stock Quote: V) are both major players in the pre-paid card market). However, fees may be higher than customers like -- Wal-Mart’s fees can reach $6 per month for things like card management, card replenishment, and an initial $3 “trigger” fee for getting the Wal-Mart card in the first place.
People deposit money into the card bank, usually online or by telephone via software managed by a third-party vendor (on-site deposits can be handled by an retailer’s customer service counter) and the card user can then use the card proceeds to shop for goods either online or at a store convenient to the user. Retailers are getting fairly crafty with prepaid cards as users can now get text messages informing them of account balances, or a “heads-up” telling the card-holder the account needs to be replenished.
There are plenty of advantages and disadvantages to prepaid cash cards. On the plus side, such cards are a safe way of handling money for people who don’t have a bank account. Again, for people without a bank account, prepaid cards allow them to shop online, where cash is taboo, thus helping both the consumer and the economy. In addition, many businesses that don’t accept cash, like car rental agencies, hotels, and airlines, do accept prepaid cards (although some still don’t, so call ahead first if you’re booking a flight, car, or hotel room to check).
On the downside, prepaid cards won’t help cardholders build or rebuild their credit scores. Credit scoring agencies don’t use them to factor in your credit score one way or another.
But if you don’t have a bank account, and want a way to still use the plastic that so many U.S. businesses demand, prepaid cash cards are a viable option.
And a pretty handy one, too.
— For more ways to save, spend, invest and borrow, visit MainStreet.com.