New prepaid cards woo bank customers

As new general-purpose reloadable prepaid cards emerge with lower fees and better features, they're catching on with more consumers. While prepaid cards have traditionally been popular with people who use them instead of bank or credit card accounts, they're now catching on with a wider group of consumers. But some experts are not convinced of their benefits. 

A study from market intelligence firm Packaged Facts shows that reloadable cards are gaining traction in the marketplace, despite most Canadians having bank accounts and debit cards. As of October 2014, there are at least 37 reloadable prepaid card programs in Canada, according to the report. reloadable-prepaid-cards

Natasha Nystrom, spokesperson for the Financial Consumer Agency
of Canada (FCAC), says part of the appeal is that prepaid cards are "pay before" tools, requiring you to load money onto a card upfront for later use, reducing the risk of overspending.

Another reason for the growing popularity of prepaid products among banked consumers is the increase in offerings from financial institutions. Scotiabank and BMO have joined Vancouver City Savings Credit Union (Vancity) and Citizens Bank in offering reloadable prepaid products.

The Scotiabank Prepaid Reloadable Visa card enables customers to make purchases anywhere that Visa is accepted. That means they can shop online without giving out personal credit or debit card information. The BMO Prepaid Travel MasterCard allows you to load money for use at millions of ATMs, shops and restaurants worldwide, making it a more secure alternative to traveller's cheques or cash, according to the bank.

Both cards also come with lower fees than some competitors.

Prepaid products a hybrid species
Newer prepaid cards have similar features to traditional banking products, such as debit and credit cards, while offering their own benefits.

For instance, the Visa Desjardins prepaid card uses the same chip-and-PIN technology as a credit card for enhanced security, as well as Visa payWave for the convenience of contactless payments at checkout. And all Visa and MasterCard prepaid cards come with the same zero-liability protection available to credit card holders.

The BMO, Vancity and Citizens Bank cards come with free extended warranty and purchase protection, while Scotiabank Scene Prepaid Reloadable Visa cardholders earn points that can be redeemed for movies. You can use Vancity and Citizens Bank prepaid cards for online bill payments and pre-authorized recurring payments, as well as for deposits for car rentals and hotel stays.

Many prepaid cards also offer free, unlimited transactions at the point of sale, unlike debit cards, which often have a fee after so many transactions. Since you load the funds before and the card isn't connected to your bank account, you don't risk overdrafting.

Finally, many prepaid cards are mobile-friendly. Visa Desjardins includes a mobile payment app (which allows you to pay directly from your mobile at the point of sale), and you can load Vancity and Citizens Bank prepaid cards via mobile banking apps.

Lower fees boost popularity
Traditionally, prepaid cards carry fees that make them unattractive to bank customers. For example, the flat fee plan for the Nextwave Titanium+ Prepaid Visa (typically offered through payday lender Money Mart) comes with both a $20 new card activation fee and a $15 monthly service fee. Those charges alone could add up to $200 after 12 months. However, the new crop of prepaid cards may foreshadow a cost structure more appealing to bank customers.

Below, we compare fees for Nextwave Titanium+ to new entrants on to the prepaid market, the Visa Desjardins prepaid card, the BMO Prepaid Travel MasterCard and the Scotiabank Prepaid Reloadable Visa.

Sample of prepaid card issuer fees
Fee Nextwave Titanium +
Visa Desjardins
BMO Prepaid Travel MasterCard
Scotiabank Reloadable
Card purchase/activation
$20 -- --
-- $6.95* $6.95 $10
Monthly service
$15 ---
-- --
Foreign currency conversion
3% 2.5% 2.5% 2.5%
International ATM withdrawal
$3 + 3% -- -- --
Online load $1.50
-- -- --
Card-to-card transfer $5 -- -- --
Live agent support call
$1.50 -- -- $2**
Paper copies (by mail) $3 -- -- --
Monthly inactivity charge $10 -- -- $3.60***
Card cancellation
$10 -- -- $10
* No fee for 16- to 25-year-olds ** First two calls per month are free *** First 36 months of card inactivity are free

Not everyone is convinced
Some personal finance experts remain skeptical about reloadable prepaid cards. Alison Griffiths, author of Count on Yourself: Take Charge of Your Money, concedes that reloadable cards have their merits.

"But I don't see why anyone with a debit card, multiple bank accounts and multiple credit cards would pay the fee, no matter how small, to have this hybrid in their wallet -- they simply add to the financial confusion," Griffiths says.

Griffiths views reloadable prepaid cards as a revenue boon to issuers, empowering them to keep your money for an extended period for free while collecting cardholder fees. She also sees very little utility in the new generation of prepaid cards that mimic credit cards with features such as purchase protection and extended warranty, saying cash-back credit cards represent much a better value proposition for consumers. Prepaid cards also do not affect your credit, so if you are looking to improve your score, a prepaid card is not the answer.

"The only positive is that lower-fee, reloadable cards can provide a bridge for those in bankruptcy and those who may not yet have built up a good enough credit rating to qualify for a regular credit card," Griffiths says.

See related: New prepaid card regulations short on consumer protections; Why debit is riskier than credit

Updated April 28, 2016

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