WHAT'S HOT this Tax Season: Prepaid Cards

So I was on a "webinar" yesterday and I actually learned something new.  An IRS presenter said that for the first time, tax refunds can be deposited onto prepaid debit cards.  I said, uhhh that sounds like a really lame excuse for a bank account.  Now that I think of it, the first prepaid card I ever heard of was for teenagers- sort of a plastic training tool.  I did some research, and prepaid is actually not as lame as I thought.  In fact, it may even be sorta useful.  The hope is that when people receive a refund on a prepaid card, they will start to use that card as a financial tool for the rest of the year.

As we learned from our deep investigation into predatory lending, people who are unbanked or underbanked pay through the nose to manage their finances.  Prepaid cards could represent an intermediate step towards more traditional banking services.  The biggest reason I think they might be useful: you don't need as much ID to get one.  Also, you don't need a credit check.  For this reason, prepaid is already popular with immigrant populations - for some cards, you can even apply with foreign ID only.  This Dec. 2006 New York Times article explains in more detail how immigrants utilize this service.  Many of the users are relieved to be able to replace wads of cash under mattresses with this more secure format.  On many cards, the maximum liability for a cardholder if the card is lost or stolen is $50.  Additionally, a great number of people say they have a very good understanding of the fare structure.  Confusing fees are a prime reason people avoid banks.

Here's what I see as advantages to prepaid:

• less ID needed
• no credit check
• more secure than cash
• difficult to overdraft
• reduced cost compared to check cashing and payday lending
• immediate liquidity - funds added are available instantly
• fee structure is clear and easy to understand
• they look like credit/debit cards, socially accepted

Of course, there is a premium for this service.  Although direct deposit onto the cards is generally free, loading cash onto a card might be $4.50, an ATM withdrawal could be $2, there may be a $1 monthly fee.  They add up.  But they will likely be cheaper than relying on check cashing.  And I'm mostly interested in prepaid as a preliminary step towards traditional banking, which can be even cheaper.  These cards also don't offer much opportunity for credit building - the card company will only report automatic bill payments to the credit bureaus.

If you're really psyched on this, you can read this large pdf Nonprofit's Guide to Prepaid.  I did. Part I is worth it.