By Kelli B. Grant
There’s not much difference between a prepaid card and a debit card — save prepaid cards’ reputation as a low-rent option for credit slackers. But now that a new card from American Express wipes out the fees that often plague both categories, it raises the question: Could a prepaid card replace your checking account?
Like its competitors, the American Express prepaid card works anywhere a credit card does, limiting spending to the cash in your account. But it skips the fees most others charge, including $10 to $15 to set up the card and an ongoing $5 to $10 per month to use it. It also offers a few perks more often found on credit cards, like roadside assistance and theft protection on purchases. Even so, its usefulness may be limited depending on how you bank.
If you’re already using a prepaid card, the new offering is a win, says Odysseas Papadimitriou, the chief executive of CardHub, a comparison site for credit and prepaid cards. The next-best cards in the category, Green Dot Prepaid Visa and Capital One Prepaid, charge $5.95 and $4.95 per month, respectively. (Capital One waives that fee if you load more than $500 per month.) Going with the American Express card would save up to $72 per year.
Analysts expect banks to try to entice more checking account users to try prepaid cards as a way to generate revenue to offset the recent 12-cent cap on fees issuers can charge a store to accept debit card purchases. Stores process prepaid cards like credit cards, which generate a more profitable 1% to 2% fee on the purchase total. Consumers, for their part, could see fewer fees with prepaid. A study from consulting company Bretton Woods found that prepaid cardholders spend roughly $73.35 per year on fees, versus $218 for a checking account.
American Express says it’s pitching the card as both a banking alternative and a complement to a checking account. But the card isn’t a perfect option for anyone looking to avoid rising checking account fees, Papadimitriou says. Notably, the card does not let cardholder get a paycheck direct-deposited in an account, offers more limited bill-pay options, and has a maximum account balance of $2,500. “With the limitations American Express put in place, it’s a product that doesn’t meet any need,” Papadimitriou says. “Otherwise, I’d call it a checking account killer.” There are still a few fees to, too, such as $5 to third-party company Green Dot to add cash to the card at a major retailer (adding money by phone or online transfer is free), and $2 for each ATM withdrawal after the first one each month.
An American Express spokeswoman says direct deposit will be made available before the end of the year, and that the balance limit may also be increased. “We haven’t received any consumer feedback that that amount is not adequate,” she says. Consumers can pay bills to any company that accepts American Express.