Who Use Prepaid Debit Cards

Suze Orman got into some hot water for her exchanges with bloggers on Twitter. Suze Orman launched a prepaid debit card. Bloggers correctly pointed out it’s not good. Suze defended herself by calling a blogger idiot. She later had to apologize.

I think bloggers are too worried about the success of Suze Orman’s The Approved Card. If Suze markets this card to the mainstream, who have access to free debit cards from their bank accounts, she won’t be successful. People are not that gullible. Well if people are, that’s a different problem.

Of course Suze Orman’s prepaid debit card isn’t a good product for most people. It’s too obvious a prepaid debit card doesn’t come close to what you get from a bank account. Some may use it occasionally for gifting but that’s about it. People are not going to replace their bank accounts with Suze Orman’s The Approved Card no matter how hard she pushes it.

There are primarily three markets for prepaid debit cards: (1) rebates and rewards; (2) gifting; and (3) the unbanked and underbanked.

Companies issue prepaid debit cards as rebates and rewards because they can get breakage and swipe fees. See More Hurdles and Breakage in Rebate Prepaid Debit Card. Suze Orman isn’t in this market.

People buy prepaid debit cards as a gift because a card looks nicer than cash or a check. They are OK with the purchase fee. Some use prepaid cards for kids’ allowance. Instead of giving a kid cash, parents put money on the kid’s prepaid debit card. Suze Orman’s The Approved Card has some appeal in this market, but she isn’t targeting it specifically. “Teach your teens financial responsibility” is last on her list of 9 reasons for choosing this card.

The real market for prepaid debit cards is the unbanked and underbanked.

Who are the unbanked and underbanked? I dug out from my bookmarks this report from the Federal Reserve Bank of Kansas:

A Study of the Unbanked & Underbanked in the Tenth Federal Reserve District

It’s a 15-page report. There’s also a shorter 3-page executive summary but you should really read the full report. It’ll be an eye-opener. According to the report,

“[U]nbanked individuals are individuals who do not have a checking or savings account. Underbanked individuals have a checking or savings account at a bank or credit union, but use nonbanks for financial services such as check cashing, money orders, bill payment, remittances or borrowing.”

There are 30 million such unbanked and underbanked households. It’s not a small fringe. They make up 25% of all households nationally.

Why don’t they have a checking or savings account? Why do they have an account but not use it as much? What do they do when they don’t have a bank account or don’t use it as the rest of us? It’s a world that we aren’t familiar with.

They don’t have a bank account because they don’t have enough money left at the end of the week to make it worthwhile to keep a bank account. When your balance fluctuates near the zero line, you will be hit hard by overdraft fees. New laws made some changes to debit card overdraft, but checks and ACH can still create overdraft as they did before.

They don’t use banks because they find retailers more convenient for cashing checks and paying bills. If you read the report, you will see the unbanked and underbanked actually have a very sophisticated system for dealing with what they’ve got. That system works much better for them than using a bank account. We don’t use that system because we are not dealing with the same situation.

A prepaid debit card is not for you and me to replace our bank accounts. Besides gifting or giving money to kids, a prepaid debit card is for those who don’t have or use a bank account — the unbanked and underbanked. I don’t suppose they read personal finance blogs. So bloggers really don’t have to worry about readers being suckered into a prepaid debit card.

Will Suze Orman be successful in the unbanked and underbanked market? Maybe. It will depend on how her product appeals to that market. She already has some established competitors like the retail giant Walmart. If she doesn’t win by delivering value to the market, the card will just die. We don’t have to worry about it.

[Update: Suze Orman was unsuccessful. Her prepaid debit card died.]

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  1. Dan says

    I don’t know how to put it politely but… it seems to me that the “unbanked/underbanked” people who use prepaid debit cards aren’t just poor, they’re also not very smart or well-informed.

    Pretty much every local area I’ve looked into has one or more credit unions offering a free checking account with no monthly fees. As your post points out, recent legislation requires customers to OPT IN to be subject to debit card overdraft fees, and one can avoid overdrafts on checks by carefully balancing one’s checkbook. In other words, not spending money you don’t have.

    It seems to me that most of the celebrities hawking prepaid debit cards (Kardashians, Lil Wayne, Russell Symons) are just vultures preying on the ignorance of their customer base.

  2. Harry Sit says

    Dan – Not aware of the available options is part of it but it’s far from the whole story. If you read the report I linked, you will see that hours and locations are important. Immediacy and finality are important. There’s a great advantage to use cash: it’s simple to track. Either you have the money or you don’t. Just count the cash. Carefully balancing one’s checkbook isn’t very realistic. If I have to watch my balance that closely to make sure it doesn’t drop below zero, I don’t think I can do it. I’d use cash or a prepaid debit card myself.

    On a related topic, there is a discussion on The Atlantic about whether credit unions can replace pay day lenders. It’s not that clear-cut that they can.

  3. Ebele says

    I agree with you about the issue of the Unbanked and underbanked. I have a colleague at work, she uses a prepaid debit card for the same reasons you pointed out. She does not want to deal with having to keep checking her account to ensure she does not get an overdraft or any other fees. She gets paid with a check and dumps it after cashing it in her card. No worries for her. As much as I consider her uninformed, she really believes she is doing the right thing for herself and I have to respect that.
    Like you pointed out, if she will switch to Suze Orman card is a different story.

  4. Dan says

    TFB, I get your point about the importance of immediacy and accessibility, especially for poor, overworked, cash-strapped consumers lacking good transportation options… although I don’t see how a prepaid debit card offers advantages in these over a no/low-fee debit card from a bank or credit union. Perhaps it’s easier to deposit cash onto a prepaid debit card, since you can offer do it at the grocery store rather than at a bank or ATM (never mind the hefty fees)?

    As for the overdraft issue, I still don’t understand how or why prepaid debit card users would prefer to have an account that simply cuts them off when they have no more money, rather than one that allows overdrafts in some cases. $35 overdraft fees are ruinous, but going to the store and being unable to buy what you need because you suddenly find out that you don’t have any money is pretty bad too. It seems like a similar amount of financial discipline is required to avoid either situation.

    In any case, for a consumer who lacks this discipline but doesn’t want to have to deal with overdraft fees anyway, why not get an ordinary free/low-cost checking account *without* opting in to debit card overdrafts, and simply use the debit card but never write checks? Then you’ve got something that’s equivalent to prepaid debit, but far lower in terms of fees and far superior in terms of services available. I just don’t understand why consumers like Ebele’s colleague don’t go this route… it sounds like a lack of education about the availability of better options is a big part of the problem.

  5. Ebele says

    Dan, I see your point and agree. I have tried to tell her I pay zero fees to my bank because I know the loopholes and I avoid them. But she insists she has been bitten before and will no longer patronize the banks. Like TFB pointed out, they just don’t want to deal with it. They are not making enough money to justify their spending time looking to make sure they don’t get bitten.

  6. Harry Sit says

    @Dan – I think we won’t get the full picture unless we step into their shoes. For some, it’s once bitten twice shy. They swear off banks even though the worse abuses are banned now. If someone abused me that badly, I wouldn’t go near them no matter what promises they are making now.

    Yes, if you only use the debit card with a checking account and never write checks or authorize ACH debits AND you opt out of debit card overdraft, the card with an account behind it can work the same as a prepaid debit card with some added benefits. However, if you are talking about a large bank with many ATMs and branches (some in grocery stores), many of them no longer offer no-minimum-balance free checking accounts. Watching the minimum balance will be difficult because you don’t get declined for dropping below the minimum. Smaller banks and credit unions still offer no-minimum free checking but they don’t have the locations or the hours the customers want.

    There’s something to be said about cash in envelopes. You have grocery money, gas money, rent money etc. in different envelopes. You look into the envelopes and you know exactly how much you still have and how much you can spend. You buy a prepaid debit card for things you can’t easily do with cash, for example buying stuff online or booking an airline ticket. It costs a few bucks, so be it.

  7. Jay Gould says

    The biggest misunderstanding about Suze Orman’s prepaid card, unfortunately stoked up by Orman herself, seems to be the notion that the Approved Card, as it is called, can help its users improve their credit scores. So it’s time we set the record straight: the Suze Orman’s card does not affect your credit score in any way, either positive or negative. Colleen Tunney-Ryan, a spokeswoman for TransUnion, a credit bureau that has partnered with Orman to provide her card’s users with access to their credit reports and scores, states it plainly: “It is important to understand that this data will not appear on any TransUnion credit report at this time.” I think that should settle it. Learn more here: http://blog.unibulmerchantservices.com/suze-ormans-prepaid-card-will-not-affect-your-credit-score.

  8. Charles L. says

    I use prepaid cards when I shop online, I can control the amount of funds a merchant has access to.

  9. Kayfabe says

    We use prepaid debit cards because I do not trust banks after several mix ups and horrible issues where my money disappeared. Also, I do not trust prepaid debit fully either because some will wait until a direct deposit is made, then close the card without warning. I have to use some type of card, unfortunately. I think the only safe method is to get a paper check and cash it without using a bank. We are poor and cannot sit around 3 days waiting for check to clear either. Theres no reason for this wait because businesses checks never bounce. Also, I am not uninformed. I know who actually uses prepaid debit cards- yes, the poor, also those who cannot afford to sit there waiting for banks to clear paychecks poor or not. Also those of us who do not trust banks. Also, people who chose to not use banks on purpose. I could get an account if I wanted, I do not want to! I have a credit card, my credits ok. Other people who do not use banks for reasons other than being poor or not informed, because they are informed! Some people want as littleconnection to Govt. and its institutions as possible. Some people still use cash only, because they do not like or want any debt or fees/they are compulsive spenders for whom credit and debit are bad options/ or cash in hand always works, credit/debit cards can suddenly not be accepted in a store. Denied or the strip on it fail. Cash always works. I prefer cash day to day. Use my credit card in emergency, but thats all. Banks make errors, computers are not foolproof and humans are imperfect. Banks lose funds too, it happened to me. It took weeks to locate during which time I list my Apt. Because my rent was list, never again! Prepaid debit cards can freeze you out of your rent also in fact. Both hold risks. The only safe way is to cash a check into cash and then only load onto card just what you need. Like stated above, online shopping with debit limits funds the store can access, especially when shopping for things “as seen on TV” or not too well known stores, who have been known to overcharge. It stops them from being able to take anything more than originally authorized. If you use a bank acct, the online store can drain the whole account. It is much much safer. If you just load $40, that is all anyones getting from the card.

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