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American Express shook up the prepaid debit card market today with the release of its new prepaid card, which they hope will earn interchange revenue instead of fees. After the Durbin Amendment’s implementation was secured last Wednesday, banks scrambled to find ways to recoup lost swipe fee revenue. AmEx will take advantage of a loophole that exempts prepaid debit from the 12-cent fee cap that applies to other debit cards.
The old revenue model: charge fees for everything
Most prepaid debit cards make money through numerous fees: ATM withdrawals, reloading, balance inquiries and monthly maintenance can come with small charges that can total more than $20 a month. The complicated fee structure, often buried in the fine print, as well as misleading marketing claims led Florida Attorney General Pam Bondi to launch an investigation into five prepaid card companies.
We’ve generally said that prepaid debit cards are rarely a sound financial choice, because they’re functionally the same as normal debit cards but cost far more. In addition, prepaid cards do nothing to raise your credit score, despite the promotional claims of some card companies. Most issuers treat prepaid debit as a cash cow that earns hundreds of dollars a year in fees that customers rarely expect.
AmEx’s prepaid cards capitalize on Durbin loophole
American Express has a different revenue model in mind. When interchange fees are capped at 12 cents, down from an average of 44 today, debit cards will become substantially less lucrative. In anticipation of lost swipe fee revenue, card issuers are charging monthly maintenance fees on their checking accounts and mounting an aggressive effort to push customers toward credit cards. American Express has a solid foothold in the credit card market, and specializes in high-swipe fee rewards credit cards. It hopes to expand to the less affluent, those who can’t or don’t want to get a credit card.
Before the Durbin Amendment, AmEx would earn substantial revenue from debit interchange fees, and would incentivize checking account customers to use their cards as often as possible. Now, AmEx hopes to draw customers toward prepaid debit, which will still high swipe fees, rather than normal debit cards, which will earn more through monthly fees than interchange.
Is AmEx actually a “consumer champion?”
American Express presents their prepaid cards as a break from the traditional fee-ridden ones. “The prepaid market is synonymous with fees,” said AmEx executive Dan Schulman. “If we were going to enter the market, we wanted to be a consumer champion.”
To their credit, AmEx’s new card is far and above the rest of the market. Their fee structure is much less complicated than most issuers’: they give you one free ATM withdrawal a month, and charge $2 per withdrawal after that. They also don’t charge a foreign transaction fee, a rarity among prepaid (or other) cards. They note, however, that ATM operators may levy their own charges. Unlike most prepaid cards, they don’t charge for a lost card, or have monthly or reloading fees. If you want to reload with cash, however, you need to use a Green Dot MoneyPak, which can cost up to $4.95.
The low fees easily put AmEx’s newest issue at the top of the prepaid debit card list. But can it stack up against a checking account?
For the most part, you’re better off with a straight-up debit card, which doesn’t charge ATM fees and can even earn rewards. After the Durbin Amendment, many banks charge monthly fees that are waived if you meet minimum balance requirements or sign up for online banking. The balance requirements hit the less affluent worse than the well-off: not only do the well-heeled tend to use credit cards more than checking accounts, but they can more easily keep $1,500 in their checking accounts to avoid fees. The less affluent and those with bad credit, though, are just the customers that AmEx’s new prepaid card is aimed at. While the AmEx might be more cost-effective than some checking accounts, especially if you find minimum balance requirements difficult, there are a number of free checking, or even rewards checking, accounts.
The best of checking: can AmEx compare?
Best of the best: PerkStreet Financial tops our list in both rewards (earn 1-2% back on all non-PIN purchases) and balance requirements to avoid maintenance fees (there are none). PerkStreet is an entirely online bank that will refund all of your ATM fees as long as you use ones on the STAR network. It easily delivers better value than AmEx’s prepaid debit card.
No balance requirement: The standard minimum balance requirement is around $1,500, but many banks have no requirement at all. Ally’s Interest Checking Account has no monthly fee and refunds all ATM fees. Capital One’s Interest Online Checking has a 1.01% yield and is completely free,while Bank of America’s eBanking account has no fee if you bank online.
Rewards checking: Some institutions offer rewards checking accounts as well. As a rule of thumb, banks tend to charge more or have higher balance requirements on their rewards debit cards, while credit unions are more lenient. Lake Michigan and Consumers Credit Unions both offer 4% yield checking accounts, and are open to all US residents.
Compared to these all-stars, AmEx’s prepaid debit card just doesn’t hold up. While its fees are substantially lower than almost any other prepaid card, it falls short against the guarantee of absolutely free checking or the promise of rewards. Still, it’s better than many checking accounts and ranks somewhere in the middle of the pack for debit in general.
We’ve compared checking accounts from banks and credit unions, and worked out the savings for a hypothetical customer who has an average daily balance of $750, spends $1,000 and withdraws money from an ATM 3 times a month. Here’s our comparison:
|Account Name||Monthly Fee||Min. Balance||Rewards||Other Fees||Savings per Month|
|Visa Buxx Prepaid||None||None||None||$10*||-$10|
|Chase Total Checking||$10||$1,500||None||None||-$10|
|Wells Fargo Everyday||$5||$1,500||None||None||-$5|
|AmEx Prepaid||None||None||None||$4 (ATM)||-$4|
|PerkStreet||None||None||1% base rate, 2-5% bonus||None||$10|
*Includes the $10 enrollment fee for US Bank customers ($15 for non-customers). These are by no means all the feescharged; see the fee schedule for complete details.