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NerdWallet Study of Prepaid Debit Cards vs. Checking Accounts

by on May 7, 2012

NerdWallet Study: Prepaid Debit Cards vs. Checking Accounts

Consumers are increasingly choosing prepaid debit cards over traditional checking accounts to avoid numerous and hidden fees. But are prepaid fees really more transparent than those for checking? Do prepaid card users really incur fewer fees?

According to our analysis, not only do prepaid cards have a similar number of fees, many prepaid fees are actually charged for basic and common services – rendering them unavoidable and ultimately more costly than checking accounts.

A recent study by the Pew Health Group found that commonly cited reasons to use prepaid centered on cost:

  • Avoiding hidden bank fees and
  • Budget and controlling spending

However, a NerdWallet analysis of 53 prepaid debit cards and 30 checking accounts at the top 5 big banks found that prepaid fees were just as complex and even more common, and that the perceived benefit of ease of budgeting comes with unexpected costs.

Reason 1: Consumers want to avoid hidden bank fees

“The idea of the marketing behind a checking account is they’re your friend; they’re your hometown bank… [but] really, they’re just lulling you into the sense of comfort because they’re going to whammy you with fees on the backside. Whereas prepaid debit cards, they’re very upfront. This is the cost of the card; this is the cost for the services.”

- Female participant of Pew Study, Houston

Among the most commonly cited reasons for eschewing checking is the fear of incurring hidden fees, such as overdraft. Prepaid debit cards list all of their fees upfront, the thinking goes, whereas so-called “free” checking accounts are laden with hidden charges.

We challenge that belief on both counts. According to our analysis, prepaid cards charge just as many fees as checking. Further, the majority of checking account fees are for non-standard services charged for relatively uncommon services (like traveler’s cheques, wire transfers, redemptions, etc), while prepaid cards charge for almost all aspects of usage, from bill payment to account closure.

Claim 1: Prepaid cards charge fewer fees than checking accounts.

NerdWallet analyzed the fees of 53 prepaid debit cards and 30 checking accounts. We found that altogether, both prepaid cards and checking accounts charged 42 fees. But while prepaid and checking charge the same number of fees, the nature of the fees make prepaids more costly and unavoidable.

Over half of prepaid fees (23 out of 42) are related to basic services, from opening an account to closing it, from loading money to spending money, from ATM use to card declines.   On the other hand, only 9 of 42 checking account fees apply to core services.

Furthermore, a closer look at such core/basic fees reveal that not only do prepaid fees outnumber checking fees across all fee categories, but also are more likely to be incurred:

Note that:

Prepaid debit cards charge far more unavoidable fees, or fees for basic usage such as making transactions, withdrawing money and opening or closing an account.

Prepaid cards charge for almost every method of loading except direct deposit, including bank transfers, cash reloads and ACH debit. Checking accounts charge only for a mobile deposit (some even provide it for free).

Checking account fees are mostly in the “may incur” category, from out-of-network ATM use to replacement cards – such fees are ultimately dependent on a consumer’s ability to adhere to the standard ways of managing their money (e.g., sticking to their bank’s ATMs, not overdrafting, etc).

Claim 2: Prepaid card fees are upfront.

Many checking account charges are fee-for-service, which consumers aren’t likely to be blindsided by: money orders, legal research and the like. That isn’t to say that all fees are so clearly delineated – among the shrouded fees were:

  • Overdrafts and overdraft protection
  • Bounced check and insufficient funds

Prepaid cards, on the other hand, charge for a host of common services that checking account customers enjoy for free, as well as many of the same charged by checking accounts:

  • Customer service
  • Decline fees, both at the point of sale and at the ATM
  • Out-of-network ATM use

And perhaps most importantly: some prepaid cards charge for overdrafts. One of the most commonly cited reasons of using prepaid is the fear of overdraft, but at least two prepaid cards allow cardholders to overdraw – and charge a fee.

Reason 2: Budgeting and controlling spending

“You’re not overdrafting, and what’s on there is what’s actually on there. If you have a prepaid card with $500, it’s a $500 limit. There’s $500 on it. If you have a credit card with $500, one, you don’t actually have $500. If you have money on your prepaid card, you’re not going to not pay it off because it’s already paid.”

—Female participant, Chicago

While prepaid cards offer better spending control than credit cards, a more like-for-like comparison is prepaid to checking. Generally, both products limit consumers to spending only what they load. However, checking accounts may allow overdrafts, essentially extending a very expensive line of credit. This is well known, and for many is the impetus to leave traditional checking. Overdraft fees are unusual with prepaid cards, but prepaid does not preclude overdrawing. And both checking and prepaid charge for bounced checks or check cancellation.

Yet only prepaid cards charge for declines – for trying to use a prepaid card and failing.

Decline and Insufficient Funds Fees

Checking accounts Prepaid Debit
Overdraft

Overdraft
Overdraft protection
Extended overdraft

Overdraft
Overdraft protection

Decline

Point-of-sale decline
ATM decline
Out-of-network ATM decline
ACH decline

Insufficient Funds

Bounced check
Returned item

Bounced check

 

Overdraft fees are a serious concern. A 2009 FDIC study found that 5% of the population overdraws more than 20 times each year, but remember that the study took place before stringent overdraft protection laws went into effect. Now, consumers can (with difficulty) opt out of overdrafts. But both prepaid and checking charge for bounced checks, and only prepaid cards have decline fees.

Conclusion: prepaid fees are equally numerous and equally unexpected

The Pew Health Group found that many prepaid users worried about checking accounts’ numerous, often unexpected fees. They preferred the upfront monthly maintenance, transaction and ATM fees to being blindsided by hefty overdraft charges.

But a NerdWallet analysis found that prepaid cards charged just as many fees as checking accounts, and for far more common services. What’s more, prepaid cards didn’t always offer the spending controls that consumers sought. Some charged overdraft fees (though, to be fair, they are lower than the standard $35), while far more charged for declined transactions, ATM withdrawals and checks.

As for the number of fees, the bulk of checking account fees are for auxiliary services such as safe deposits, various permutations of wire transfers and check images. Prepaid cards, by contrast, levy unexpected but common charges for customer service, account closure, and ATM balance inquiries.

From the number to the nature of their fees, prepaid cards fall short of checking.

Appendix: Full list of fees
Part 1: Core services

  Checking accounts Prepaid Debit
Account Fees
Will Incur Activation/card purchase
Monthly maintenance
Account closure
May Incur Inactivity
Monthly maintenance
(waived if you meet certain conditions)
Inactivity
Additional card purchase
Additional card monthly surcharge
Check refund
Likely Won’t Incur Card replacement
Express card replacement
Early account closure
Card replacement
Express card replacement

Transaction Fees

Will Incur PIN transaction
Signature transaction
Online bill payment
Paper bill payment

ATM Fees

Will Incur Withdrawal
Balance Inquiry
May Incur Out-of-network withdrawal
OON balance inquiry
ATM statement
Out-of-network withdrawal
OON balance inquiry

Loading/Depositing Funds

Will Incur
May Incur Mobile deposit (free at certain banks) Cash reload
Mobile deposit
Bank transfer
Credit card transfer
ACH debit
Likely Won’t Incur Instant bank transfer

Part 2: Auxiliary fees and services

Transfer fees

Wire transfer
(6 permutations of inbound/outbound, domestic/international and USD/foreign currency)
Standard wire transfer
Card-to-bank
Card-to-card

Check-related fees

Check collection
Counter check
Money order
Cashier’s check
Stop payment
Check image
Check re-issue
Stop payment

 

International fees

Will Incur Foreign transaction fee Foreign transaction fee
May Incur ATM withdrawal
Single-sign traveler’s cheques
Traveler’s cheques for two
Next-day traveler’s cheques
ATM withdrawal
ATM balance inquiry
Likely Won’t Incur Cash advance fee ATM decline

Additional services

Will Incur
May Incur Print statement
Additional statement
Customer service
Paper statement
Likely Won’t Incur Cash advance fee
Clipped coupon redemption
Municipal bond redemption
Safe deposit lock drilling
Safe deposit late payment
Balance verification
(descendant’s account)
Legal process fee
Cash advance fee
Transaction dispute
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