According to Mintel, a leading market research company, one factor in the growing popularity of prepaid cards is the fallout from discontent with traditional checking accounts. Either people are finding it harder to get a free and hassle-free checking account, or they don’t like the fees for such events as unintentional overdrafts or low balances.

In Mintel’s recent survey, 19% of respondents overall stated that they would be interested in using prepaid cards to pay bills, rather than a banking account. More importantly, 25% of households earning more than $100K per year, the more profitable and desirable customers for banks, agreed that they would be interested in using prepaid cards. Their main motivation was to avoid overdraft and/or other types of banking fees.

What are these prepaid card prospective customers looking for? Mintel’s research show:

What are the most popular ways for prepaid providers to offer incentives to attract this new class of customer? According to Mintel, approximately six in 10 people say they would be interested if a rebate or cashback were offered for using the prepaid card and seven in 10 find purchase discounts at merchants to be an attractive offer.

Fact is, with the new consumer protection laws put in place by congress, banks can no longer allow transactions for debit card holders create an overdraft. However, if a cardholder opts in for “overdraft protection” then they can put through overdrafts and potentially charge the customer a fee–either for the overdraft protection or for any overdrafts themselves. This is why you may have received ominous sounding emails or direct mail from your bank warning you that “you are no longer protected.”

Prepaid cash back rewards programs do exist. In fact MiCash is about to announce our own cash back rewards program very soon. Such programs let you shop at your favorite national or local retailers and restaurants, and redeem actual cash back that is credited to your prepaid card account.

Using prepaid cards to gamble on offshore Internet gambling websites is not allowed under new U.S. legal rules that went into effect June 1, 2010. It is now up to banks and prepaid card companies to enforce the law, known as the Unlawful Internet Gambling Enforcement Act (UIGEA). The law is specifies that card issuers must police “illegal online gambling” transactions, but the Off Shore Gaming Association points out that the government has not provided clear guidance about what that exactly means.

It is important to keep in mind that the UIGEA was not written to go after any player sending money offshore or receiving payouts from gaming companies. Instead, it enforces steep penalties on financial institutions for allowing ‘illegal Internet gambling’ transactions to occur.

Some further background from Wikipedia.

With as many as 1 in 4 American families remaining unbanked or “underbanked” there remains strong demand for alternatives to traditional checking accounts or credit cards. Prepaid cards are increasingly an option for many consumers and employers.

A recent article in the International Business Times underscored the growing acceptance of prepaid cards as a payment method for consumers of all types.

Demand for prepaid debit cards is expected to soar, with as much as $118.5 billion to be loaded into the cards in the United States by 2012, up from $8.7 billion in 2008, according to research firm Mercator Advisory Group.

“These cards can be used anywhere just like a debit card and you can reload them, so it’s becoming more common, and consumers love the convenience,” Signal Hill analyst Mayank Tandon said.

Also driving this growth is the fact that more employers like Wal Mart are eliminating paychecks and instead requiring employees to set up direct deposit to a checking account or if they don’t have a checking account, accepting their pay on a prepaid payroll card.

MasterCard and Visa continue to grow their debit networks. In all, it looks like bright days ahead for prepaid cards, and more options for prepaid cardholders.

College student credit cards? What to consider. This presentation from Micash offers helpful tips if you are a student considering getting your first credit card.

If you have bad credit you can build credit history with a prepaid card through the iAdvance Line of Credit^® from MetaBank. iAdvance is designed for people who want to improve their credit score, because each time you take out a short term loan and pay it back through iAdvance, your loan repayment performance is reported to the three major credit bureaus monthly. Your credit score largely determines whether or not you can get a car loan or other forms of credit and the amount of finance charges you will pay. The higher the score, the better.

Three Major Credit Bureaus

You are entitled to one free credit report a year from each of these companies. Here’s a good article from MSN Money on how to obtain yours.

iAdvance Line of Credit^® from MetaBank is Available with Prepaid Cards

Here’s how it works. First you set up a direct deposit on your prepaid card. When you take out an iAdvance short term loan in $20 increments, you will automatically pay back the loan at the time of your next direct deposit. Your available line of credit is determined by your credit history and, according to iAdvance, is capped at 50% of your direct deposit amount. So, if you have $500 directly deposited to your card, the most you could borrow at any time is $250.

When you take out an iAdvance you will pay 12.5 percent of the amount of each advance. For example, for every $20 that you advance, the advance fee will be $2.50. You won’t pay more than that, nor any fees for paying it back early.  Bear in mind that if you are just looking for loan to get you by until payday, there may be more economical loans available to you.

Is iAdvance a Payday Loan?

Some times, you run out of money, and you are forced to borrow to make it to your next paycheck. The problem with taking out “payday loans” to get you through, is that you can get caught in a vicious cycle of continually borrowing money to pay back your last payday loan, at a high interest rate. On an annual basis, your APR, or annual percentage rate, can soar upwards of 600% depending on where you get your loans! So you end up paying $600 in one year to borrow just $100! The APR on iAdvance is 150 percent.

iAdvance is an “advance” on your next direct deposit. In our view, it’s primary value is in building credit history. It is designed to be a short-term solution. “You should not use iAdvance if you believe you cannot repay your loan without borrowing again or your cash shortage is expected to last more than one pay period,” recommends MetaBank. “If you use the service for more than 12 consecutive months your iAdvance account may be temporarily suspended.”

If you have a MasterCard® prepaid card, or once you get your MiCash card, to learn more and enroll visit www.MyiAdvance.com and click on the enroll button.

People looking for prepaid debit cards can find them at 7 Eleven stores nationwide. Or, if you already have a prepaid Visa® or prepaid MasterCard® and are looking for a way to load it with money, you can also find Green Dot® MoneyPaks at any 7 Eleven convenience store.

7-11 Store Locator

This online 7-11 Locator can help you find the nearest location. There are more than 6,970 7-Eleven stores in the U.S. and Canada. Do you know how this chain of convenience stores got its name? July 11 (7/11) is the official birthday of the business back in 1927.

• Of all U.S. retailers, 7-Eleven sells the most … USA Today newspapers, cold beer, cold single-serve bottled water, cold Gatorade, fresh-grilled hot dogs and money orders.
• Nearly one-third of the 6 million people who stop by a U.S. 7-Eleven store each day purchase immediately consumable food.

You can watch a video of how to load money by clicking LOAD MONEY in the navigation bar above.

Today, the electronic network for debit and credit card transactions is vast. Credit cards have been around since the mid 20^th century, and earlier versions even existed at the end of the 19^th century. The first ATM cards appeared in the early 1970s and were limited to allowing people to withdraw money from a checking account, but could not be used for purchases. By the 1980s debit cards emerged as an alternative to checks for making purchases with money out of one’s personal checking account. Over the past decade,   “prepaid debit cards” have become increasingly popular. Also issued by banks, they work like traditional debit cards, but are not connected to a checking account.

Now, the lines are blurring between the two forms of payment—debit or credit—for both merchants and consumers. When someone pulls out a plastic card with the MasterCard or Visa logo on it to pay for food, gas, or a store purchase, he or she may conduct the transaction using a signature, or in the case of a debit card, by entering a PIN number on a check out keypad. The signature payment method runs on a credit card network. The PIN payment method runs on a debit network. Merchants pay a fee in either case (to MasterCard or Visa) as part of their doing business.  This fee is slightly lower in the case of PIN transactions, which is why some retailers like Wal Mart and CVS Pharmacy encourage debit card users to pay by PIN.

The real difference between credit cards and debit cards has more to do with the funds being transferred. When you buy something with a credit card, you are not spending your own money but rather borrowing money against a credit line that the bank issuing the card has extended to you. The only limit on your spending is the limit imposed by the credit card company. So, when you make a payment towards your outstanding balance you are paying back the credit card company for earlier purchases.

Here’s what happens behind the scenes when you make debit card purchase. You are actually accessing your own money that is sitting in a bank account. As the transaction happens, money is transferred out of your account, travels across the network, and is transferred into the merchant’s bank account. PIN purchases happen in real time, so the amount in your account is verified and transferred immediately. Signature transactions, which travel across the credit card network, do not have to happen in real time but can happen hours later in a “batch” process with other transactions. The transfer of funds from the cardholder to the merchant can also be delayed, some times as long as two days, depending on when the batch process is executed.

So what’s the difference between a prepaid debit card and a bank debit card or ATM card? The real differences are more technical than actual. For both kinds of cards, you deposit your own money with the card account and withdraw it as you see fit, either by making ATM cash withdrawals or by using the card for purchases. A bank card or ATM card (sometimes called a checkcard) is connected to a checking account. Typically, there are no fees associated with purchases, or when using an ATM within the bank’s network. In contrast, a prepaid card is not connected with a checking account but stands alone. There is usually some fee structure in place for using the card. For example, each purchase may generate a 90 cent fee, or the card holder may pay a flat $10 per month for using the card. A prepaid card is a good choice for people who would like to get a debit card but have trouble opening a checking account.

Prepaid cards like the MiCash Mastercard are also a convenient alternative to credit cards, because prepaid cards that bear the Visa or MasterCard logo are accepted worldwide like credit cards. They are a good option for people with bad credit or a lack of a credit history, because they do not require a credit bureau check to be approved.

A report by the Aite Group, a leading independent research and advisory firm, states that 14% of checking account users would save money by having a prepaid debit card rather than a checking account.

For years, banks in the United States have viewed unbanked and underbanked consumers as a promising segment they could address through traditional checking account relationships. Few banks have realized that new technology and financial products may actually render the checking account relationship less attractive to this customer segment. In fact, at least 14% of checking account holders would be better off switching to a prepaid debit card. (Read the article on Aite’s website).

So who are these people? Their average savings range from zero upwards of $1,900, according to Aite. Generally speaking, the less able you are to maintain a minimum balance, the more likely you are to inadvertently bounce checks and pay overdraft fees and other related fees. The more likely you are to establish an account that may not suit your needs as far as online banking, phone banking, and checking your balance through text messaging. You can manage a prepaid card account all three of these ways.

Prepaid debit card users and people looking for ways to share money with friends or family who may live in another state have a couple of alternatives to the expense of wire transfers.

Flickr image by Quaziephoto

The first method is to get a prepaid card that offers a “companion card” or second card tied to the card account. At MiCash we call this the Maestro card. This second card can be loaded with money that is transferred from the primary prepaid card account it is connected to. These transfers can be done online by logging into your card account or by calling customer service. The charge is $2 to transfer money from a MiCash card onto the Maestro companion card. Once the MiCash Maestro companion card is loaded with money, it can be used for purchases wherever Maestro cards are accepted throughout MasterCard®’s debit card network (but please note that it won’t have the MasterCard logo printed on the face of the card). Any applicable transaction fees will also apply for each use of the Maestro card. The Maestro card can be used until it is exhausted of funds (but it can also be reloaded with more funds).

Another equally convenient way to share funds is to have your family member simply get a MiCash MasterCard, and then you can help them out by adding money to the card using Greendot MoneyPaks®. Here’s how it works. Let’s say you want to put money on your college student’s credit card only they can’t get a credit card due to the recent changes in credit card laws, so they have a prepaid card instead. What you do is go to any CVS, Walgreens, K-Mart, Wal-Mart, 7-Eleven, or other outlet that sells Greendot MoneyPaks. At the checkout register add any amount of cash from $20 to $500 to the card. A $4.95 service fee will be added to your total. Your Greendot MoneyPak will have a unique card number identifier. Next, you can call the toll free number on the Greendot MoneyPak or visit www.moneypak.com and transfer the money from the card (identified by its unique number) to your MiCash Card, identified by its unique account number. Within just a few minutes, the money transferred using this Greendot Moneypak method will appear on your MiCash card, ready to use.

Flickr image by Teresia

A prepaid debit card allows you to pay for gas at the pump with plastic. However, you may not realize that many gas stations will preauthorize as much as $50 or even $75 on the card if you use a signature transaction instead of a PIN transaction. This is also known as a “block” on the card. The reason it happens is that the gas station doesn’t know if you have enough money on your card to cover your gasoline purchase. Find out more about blocks on the FTC website.

In an MSN Money article British Petroleum spokesperson Sarah Howell explains, “We want to make sure that we’re protected, that we get payment for the gasoline.”

A PIN transaction at the pump (or inside the gas station) is in real time, and avoids the block or hold on your card. However, because signature transactions are “offline” and not in real time you may experience a block for a few hours or even several days until the transactions are processed in a “batch” process at some point in the future.

In the case of a checking account debit card, if you have less than the block amount in your account, you may be hit with an overdraft charge, even though your actual charge is less than your balance. For example, suppose your pump transaction is $27 and you have a $50 balance in your checking account. The pump pre-authorization of $75 causes you to be temporarily overdrawn.

The MiCash prepaid MasterCard protects you from any overdraft fees because whenever you attempt a transaction that is more than the cash you have loaded onto your card, the transaction will be rejected at the point of sale. Not all prepaid cards are alike and some do allow overdrafts and charge overdraft fees.

The bottom line?

• Use your PIN number when paying at the pump, or
• Have at least $75 on your card to cover any pre-authorization “blocks” on signature point-of-sale transactions.