Prepaid debit cards are the fastest growing form of electronic payment in the nation.
Celebrities such as Def Jam Co-Founder Russell Simmons, rapper Lil Wayne and now financial guru and CNBC host Suze Orman are hawking their cards to the masses, wanting a piece of the booming prepaid debit card market. Federal Reserve data shows prepaid card transactions grew more than 20 percent between 2006 and 2009.
These cards are geared toward individuals with little or no credit history or those who have difficulty obtaining traditional credit cards. A 2009 FDIC survey found that 9 million American households do not have a checking or savings account. According to the Mercator Advisory Group, consumers added approximately $71 billion onto prepaid cards last year, a dramatic increase from the $2.7 billion in 2005. The consulting group estimates that the prepaid debit card market will expand to $150 billion in 2012.
Prepaid cards offer perks to a certain segment of the population that it would not normally enjoy, such as the convenience of using plastic to purchase goods online and withdrawing money from an ATM. They do not contribute to one's credit score and often come attached with exorbitant fees.
Simmons and four other prepaid companies (First Data Corporation, Green Dot Corporation, Account Now, Inc., Netspend Corporation, Unirush Financial Services, LLC) are being investigated by the Florida Attorney General's office for misrepresenting their products and forcing users to pay hidden fees on every transaction.
FICO CEO Mark Greene tells Henry Blodget in the attached clip that prepaid cards are " basically a substitute for a checking account" and a "a great tool for people who are new to personal finance" like college students. There are benefits to choosing such a card, Greene says, but that depends on how often the card is utilized.
"If you use them sparingly they can be a good deal," he adds. "They do teach you how to manage your personal finances. They're sort of a training wheel before you're ready for a regular credit card."
The fees connected to these cards vary from card purveyor but it's not uncommon for users to rack up $50 to $100 in monthly charges, says Greene.
Orman's Approved Card offers benefits that its competitors do not, such as identity protection and a credit monitoring service. In an interview with the New York Times, Orman responded to criticism about the industry and her decision to enter the fast-growing market:
"I couldn't be more proud of this card if I tried," she said in the article. "There is something radically wrong here. We are rewarding people for having credit and punishing people who pay in cash. I want to change that paradigm."
Orman charges a one-time $3 flat fee for her card plus a monthly $3 charge. Simmons offers two prepaid credit plans, with the monthly option costing $9.95 per month (plus a one-time fee, convenience fee, ATM fee, currency conversion fee, etc). Wal-Mart, in partnership with Green Dot, commands similar fees for its card. Bowing to pressure by consumer advocacy groups, the Kardashian sisters pulled the plug on their prepaid debit card late last year.
For more on this: Watch Dan Gross' interview with Steve Streit, CEO of Green Dot!
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Check out Yahoo! Finance's interview with Russell Simmons