A rack of Green Dot prepaid cards in a drugstore. As the market grows, prepaid cards are becoming more visible and are offered at grocery stores, Wal-Mart, 7-11, and check cashing stores. Some providers operate entirely online.
For the underbanked, prepaid cards are an alternative to check cashers and payday lenders. Some of the cards are sold through fringe bankers. An ACE Cash Express store in Falls Church, Va. advertised during tax season that it would “cash” tax refund debit cards, for a fee.
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It began with just one bad check, a few dollars short on a rent payment. But the $35 overdraft charge, plus another $50 late fee to the rental company, sent Betty White down a deep financial hole. Another check bounced, then another, then another. By the time it was all over, White owed $600 in fees and unpaid bills.

“It was like a snowball effect,” said White, 34, who earns between $25,000 and $31,000 a year as an administrative assistant for a Washington, D.C. nonprofit. “Everything was late, the rent was late, the car note was thrown off, insurance and everything. It was just terrible. The fees just keep going, the longer you are overdrawn.”

She figured out one way to get out of the mess: “Overtime, overtime, overtime, that’s how I did it.” She also took in extra work at night at home, typing in documents on the computer for clients. “It took about two months to pay everything off,” said White, a single mother of five. “I was exhausted.”

White also figured out something else: She needed a different way to manage her money. So, after she got a tax refund check two years ago, she made a major move. She didn’t put her check in the bank. Instead, she loaded it onto prepaid debit card. And in doing so, she stepped into an entirely new financial world.

Pre-paid debit cards are a rapidly growing financial services phenomenon mostly out of sight to many middle-class consumers. The prepaid cards are a new lifeline, of sorts, for the 60 million Americans who are unbanked and underbanked. They’ve overdrawn their accounts or bounced one too many checks. Their names are lodged in ChexSystems, a black mark that precludes them for years from keeping a bank account. They don’t trust banks, anyway. They’ve been paying high fees to check cashing companies instead.

So they’ve turned to prepaid cards, which look like debit or credit cards, but function in a different way. A consumer loads a prepaid debit card with a specific amount of cash, and then draws down from it for purchases. A bank partner issues the cards to the prepaid provider, but doesn’t require a consumer to hold an account, or to get a credit check. Standard debit cards, by contrast, are tied to money in a consumer’s bank account.

As the economy weakened in the past few years, prepaid cards soared in popularity. That’s likely to continue. Celebrities like Russell Simmons and Tom Joyner advertise cards branded with their names. The Aite Group, a research firm that follows the industry, predicted that the amount of money loaded onto the cards will grow from $24 billion in 2009 to $104 billion in 2014. Plus, the Aite Group reported, persistent high unemployment and creditworthiness problems will create more demand, increasing the number of users from 3.4 million in 2009 to 7 million by 2014.

“With mainstream institutions retreating for the hills, vast swaths of the consumer population have seen their banking and borrowing options diminish,” the Aite report said. “This phenomenon, which we call ‘The Great Void,’ is creating a historic opportunity for prepaid debit card providers to meet the needs of consumers with reduced options.”

But whether prepaid debit cards can fill the great void for consumers like White remains unclear.  Prepaid cards are growing into a new kind of bank for the underserved, outside the boundaries of the financial system. Regulators aren’t sure yet what credit products to allow on the cards, or which consumer protections to apply. Already, prepaid cards have come under fire for steep and hidden fees on everyday transactions, like using ATMs or calling customer service.

Fees aren’t the only concern. The market holds enormous promise to finally link low-income consumers with financial services from credit to savings accounts to insurance - and even more. But extending prepaid’s role beyond a bank account substitute carries perils as well. It could widen the separation of poor people from the financial mainstream. It could relegate them to an inferior - or even predatory - system. Prepaid’s direction may become a test of whether the lessons of the recent financial crisis reverberate in any meaningful way.

“To the extent that these cards can offer low transaction costs and help build assets, that’s good,” said Tom Feltner, vice president of the Woodstock Institute in Chicago, a nonprofit organization that focuses on the economic issues of low-income Americans.  “They do fill a need for pent-up demand for credit. But they have to also be part of the financial services continuum. They can’t be a product that just funnels off low-income folks into second-tier financial services.”

For those folks, the stakes surrounding prepaid are high. The cards are increasingly popular among African American single mothers earning $30,000 a year or less, for example. As White’s experience shows, the slightest financial misstep carries a steep price.

“I’m horrible at budgeting, so I can only spend what I put on my card,” said White, who uses an UPside Visa prepaid card. “My financial health is very important to me. Savings are very important to me. I don’t want to end up at age 65 or 70 as a greeter at Walmart.”

As the prepaid debate continues, the cards are more visible than ever.  Walk into a Walmart, drop by a Rite-Aid, or stop in at a check cashing store, and you’ll run into a rack of them. A consumer can load a paycheck or cash on the card, and instantly have a form of plastic, with a Visa or MasterCard logo, to use almost anywhere. They’ll know, to the penny, how much money they have available. They don’t have to carry cash around. They can get the cards at the end of a late shift or at night, outside normal banking hours, or even entirely online. Consumers also can have their paychecks, government benefits, and tax refunds electronically deposited onto their cards.

Card providers also are adding more services, and ramping up their reach to the underbanked.

Mango Financial Inc. opened its first brick and mortar prepaid storefront in Austin, Tex. in April of last year. Mango’s goal is to offer the unbanked a long-term financial relationship, with bilingual coaches providing one-on-one financial advice and self-service kiosks available for checking card balances and transferring money. Mango also has a financial literacy blog.

Mango plans to expand the concept by franchising the bright, orange-colored stores, and opening additional ones with other partners, said co-founder Bertrand Sosa. In a move that is likely to be controversial, Mango and several other providers also are trying to figure out ways to develop short term loans on prepaid cards – despite a crackdown last fall by regulators on a line of credit offered on NetSpend and AccountNow prepaid cards.

With banks closing branches in poor neighborhoods and adding new checking and ATM fees, supporters argue that prepaid can fill an increasing need for credit and other financial products. Prepaid cards also present a platform for mobile banking, from text alerts on account balances to transferring funds by cellphone or other devices. The venture capital community already is backing prepaid providers and products. Successful recent IPOs by Green Dot and NetSpend have fed additional enthusiasm.

“We’ve been excited about prepaid for many years,” said Jennifer Tescher, president and CEO of the Center for Financial Services Innovation, a Chicago nonprofit research group that focuses on the unbanked, and also invests in companies that that serve them.

But the excitement comes with wariness.

Even prepaid supporters - and some providers themselves - strongly oppose adding lines of credit, or any short-term loans, to the cards, calling them inappropriate for people already having trouble managing their finances. They are skeptical of add-ons to cards, like credit reporting and credit building features that promise to report on-time payments for utility, cable, rent or other bills to alternative credit agencies. Critics say the features confuse consumers, and do nothing to improve their credit.

A recent trend among some issuers involves tying the cards to financial literacy and financial empowerment, with budgeting programs to track spending, online financial literacy courses, and financial tips and advice. Consumers choosing a card must discern which financial features might legitimately benefit them, and which are mainly marketing tools.

“I’m seeing a lot of gimmicks out there,” said Steve Streit, CEO and founder of Green Dot Corp., a leading prepaid provider that sells its cards through Walmart and many other retail outlets. “But simple is best. It’s got to be easy for people to use, and trust and understand.”

Given all the debate, advocates are pushing for the prepaid market to become a priority for the new Consumer Financial Protection Bureau, which already has signaled that prepaid fees are on its radar. Still, the bureau is under political fire and facing a full plate of other issues. Some longtime financial industry watchers worry that regulators trying to stay on top of changes in prepaid cards in general, and mobile banking in particular, already have their hands full.

“Part of what I hoped we learned from the financial crisis is that regulators need to be paying attention, even in the pre-launch stage,” said Kathleen Engel, a professor at Suffolk University Law School in Boston, and co-author of  “The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps.” “I’m not saying we need a product approval system, but there needs to be greater attention paid at that early point in the process, especially for prepaid cards and mobile banking. My concern is that there’s a lack of oversight right now.”

Cards issuers are creating new banking partnerships, with obscure or smaller players that entered early into prepaid dominating the market, like The Bancorp Bank or Columbus Bank &Trust. Green Dot is trying to buy Bonneville Bank, a tiny bank in Utah.

Engel and others say bank partners for prepaid firms need to be closely examined, citing past abuses of the relationship. Payday lenders used “rent a bank” partners to evade usury limits in some states, until regulators stepped in a few years ago. Cross-selling that allows issuers to track cardholders’ spending habits and then sell that information to other companies, so they can market products to them, also needs to be monitored, she said.

Until its direction becomes clear, the prepaid industry teeters in the gray area between traditional banking and the fringe financial system, giving consumers reason for caution.

“I’m a prepaid fan, and I think this tool can be a game-changer,” said Tim Sloane, an analyst with the Mercator Advisory Group, a research firm that advises the payments and banking industries. The underbanked represent a big market, and an open one, Sloane said. “It’s not a market that’s well served by check cashers and payday lenders. It’s not well served by banks.”

“Yes, there are people out there who are going to use this tool to do nothing but try to rip people off. They’re going to go after people who don’t have the time to think it through. But the other side of this tool is that there also are going to be traditional financial institutions and alternative suppliers really trying to manage costs and bring innovative products to this market.”

The prepaid market’s future, and where it stands now, are different things, Sloane noted. The transaction fees embedded in the cards, along with the way many are marketed and sold, means the worker standing in front of a rack of cards at the 7-11, after his late shift, will need at least a high school degree and hours of his day to sift through the cards and fees and figure out which is best for him. That’s not a luxury many of the underbanked usually have.

A MIXED BAG

Lana Willis, a teacher and single mother in Covina, Calif., talks about her Green Dot card in emotional terms. “It has changed my life,” she said. Willis, 40, estimates she has spent more than $2,000 in bank fees over the past 10 years, trying to manage money for two mentally challenged sisters 40 miles away in San Bernardino, Calif. Their parents are deceased. Willis, who earns about $60,000 a year, works a second job on the weekends to support her sisters, one of whom died last year.

Until a few years ago, Willis regularly spent $14.95 or so in fees to Western Union to wire her sisters money. Sometimes they couldn’t find a store with Western Union Access. When they could, they would often quickly lose the money.  “Camilla, my sister, would walk down the street with cash falling out of her pockets,” Willis said. Checks bounced on their accounts, or they couldn’t keep enough money in them to avoid fees.

Two years ago, Willis saw a Green Dot card in a Rite-Aid. The change, she said, has been dramatic. She can transfer her bank funds to her sister’s card online, keep track of the money, and give her sister an alternative to carrying cash to buy groceries. “It’s made my sister, Monica, feel more independent, and it’s so much easier for me to manage her money,” said Willis. In addition, Willis’ frequent use of her own prepaid card for small purchases like a soda waives her $4.95 monthly fee.

The experiences of prepaid customers like Willis are behind the excitement surrounding prepaid, which in some circles generates a buzz similar to the kind microlending did in its early stages. Internet blogs detail new technology for the unbanked. The Economist profiled Mango and the “juicy” unbanked market.

Mango drew attention by adding savings accounts earning 5.1 percent interest. Sosa and his brother Roy also made a pledge in 2008 to the Clinton Global Initiative to bank five million of the world’s unbanked within five years through their MPower Ventures, a socially committed venture fund. Clinton himself has given prepaid his public blessing, describing it in a 2010 address to an industry conference as a way to bridge the gap between the cash economy and the financial mainstream. Clinton also urged providers to use the cards to teach financial management.

Mango and Green Dot are among issuers in the prepaid market that describe themselves as mission-focused, with their main goal to aid the unbanked.

“This is a personal passion of ours, to help people manage their money,” said Sosa, who also co-founded prepaid provider NetSpend in 1999 before selling it to Capital One in 2007. “We are providing a way to show them how to establish a banking relationship with us. It’s not like pushing some academic form of financial literacy information or fancy brochure. People don’t read those things. The financial literacy is built into the DNA of our product.”

To Green Dot’s Streit, it’s not an exaggeration to say that prepaid has made a dramatic difference in the lives of people cut off from checking accounts, credit cards and other banking services. “It’s a very transformative product for those consumers,” he said. “Imagine living without plastic.”

But the market also includes providers unlikely to fall into the mission-focused category, including the notorious Kardashian celebrity card pulled from the market last fall due to predatory fees. Established firms exist alongside smaller companies that come and go. Features pop up and disappear. The now-defunct Eufora card promised to rebuild a user’s credit by reporting to one major credit bureau – for a $119.95 annual charge. Overdraft and shortage programs – which consumer advocates deride as thinly disguised cash advances with payday lending-like fees - are commonplace on cards.

Even consumer advocates hold differing views of the market. Like Woodstock’s Feltner, some believe cards need to lead a consumer back to a bank, or at least to mainstream credit products. Others say a prepaid card can serve separately as a consumer’s main financial tool, outside the traditional financial system.

“This is an issue that kind of divides advocates,” said Adam Rust, research director for the Community Reinvestment Association of North Carolina.

In his view, “the banks are saying pretty clearly that they don’t want these consumers as customers,” which means they can be better off with a prepaid card. A typical prepaid consumer lives paycheck to paycheck, with life savings of “next to zero,” he noted. For them, avoiding bank fees by using prepaid “is the next best thing. It’s better than carrying cash. It’s better than paying check cashers. And if they have only a few transactions per month, and use the right ATM, they won’t face too many fees. It’s a system that works for a lot of people, at a lower cost.”

But there are good and bad cards. Rust fought against NetSpend’s loan product, and opposes adding credit to the cards. While prepaid has the potential to improve the financial lives of the unbanked, he said, it’s still necessary to keep a close eye on its direction.

“It is an innovation,” Rust said of the prepaid market. “But innovation is a word we’ve heard before. Innovation was the code word for why subprime lending was supposed to be so great. It was a series of innovations that made so many people get into a mortgage they couldn’t afford.”

Patrice Peyret, CEO of Plastyc, an online provider that issues the Upside card, said the prepaid world is shaking out and eventually will weed out some firms from the market, making it easier to navigate for consumers. “It’s still too noisy out there,” he said. “There are too many players.  And too many companies are nickel and diming their customers to death.”

But as the market grows, fees will become more transparent, and features easier to access, Peyret said. Right now, he said, the industry is trying to figure out how to add new technology on the cards that will be useful to consumers.

For example, most online budgeting programs in the mainstream financial world are aimed at middle-class consumers, who have retirement plans, investments, and other complicated finances. Prepaid users would benefit more from a streamed-down version of those personal financial management tools, he said.

Peyret said his firm, which already allows users to write virtual checks to pay the landlord or for other bills, has been considering adding a “virtual savings purse.” It would enable a user to log on to his account, and drag a small amount of funds away from his prepaid card balance. But providers have to be careful that such budgeting or financial literacy features don’t end up adding another layer of confusion. “This is an example of something that needs to be carefully engineered,” Peyret said. “You don’t want to freak people out and think that their money has disappeared. With a lot of these things, it’s mostly, again, a question of how to present them to a customer in a way that makes sense.”

Providers have been remiss by not initially offering online fee calculators, an easy way for consumers to figure out how much a card will cost them, based on how they’ll use it, he said.

“We’re still figuring it out,” Peyret said. “So far, our industry hasn’t done a very good job of trying to match the needs of our customers.”

CREDIT DISPUTES

The fees and the Kardashian card have overshadowed other sources of contention in the prepaid market - particularly loans on cards. Last fall, the Office of Thrift Supervision ordered MetaBank to stop marketing its i-Advance product, which offered a line of credit on a prepaid card.  The OTS charged that MetaBank  “engaged in unfair or deceptive acts or practices” with iAdvance, which offered credit for a fee of $2.50 for every $20 loaned. MetaBank then collected the fee with a consumer’s next direct deposit, and within 35 days.

“The automatic collection, coupled with an interest rate that easily exceeded 300 percent depending upon the loan duration, had a lot in common with classic payday,” Rust wrote in his Bank Talk blog, which covers the finances of the unbanked.

Not longer after MetaBank’s move, Urban Trust Bank also pulled its Elastic card, a product developed by Think Finance, an online payday lender based in Fort Worth, Tex. The Elastic – with fees and terms similar to iAdvance - was a prepaid debit card with a credit line of up to $500, marketed as emergency cash for unexpected medical or other bills. The card also touted financial education benefits, such as fee rebates for timely payments and payment reporting to the three major credit bureaus.

Tescher and some others believe that regulators aren’t sure yet how to oversee credit added to prepaid cards, which has resulted in confusion for issuers. And no one knows what the CFPB, the new federal consumer agency, may decide about loans on cards. “I think there was a growing amount of innovation beginning to occur that’s now on hold,” Tescher told American Banker in December.

That could change. AccountNow and Mango are trying to figure out acceptable ways to provide loans. Aite group said it expects more issuers to come up with loan products. Think Finance said it is retooling its products.

Greg Pacheco, vice president of marketing for AccountNow, said it was unfair to characterize iAdvance as predatory. He also said that it’s appropriate to try to offer credit products on the cards.

“I think the product we had offered was substantially cheaper than payday loans,” he said. Fees for iAdvance, he said, amounted to $12.50 per $100, while payday loan fees can run from $17 to $30 per $100.

Pacheco said that “there’s a general concern about taking advantage of the underserved’’ that makes regulators wary. But at the same time, he said, for consumers “it’s definitely a desirable benefit to have on the account, to be able to offer a short term line of credit.” He said his firm is working to provide a loan product that regulators will approve.

The loan issue divides prepaid firms. Mango’s Sosa also believes that the right kind of loan can be added to cards.
“The term prepaid is sometimes thought of as some sort of ‘less than’ type product, and not as a full fledged banking relationship,” Sosa said. “But in its true form, it is a full fledged financial relationship. Once you sign up prepaid customers, you are taking someone unbanked, and banking them. You’re establishing a financial relationship with them, and then you have to give them the tools to help them grow it.”

The reality in poor neighborhoods, Sosa said, is that banks usually provide credit “as an afterthought,” to meet their minimum Community Reinvestment Act requirements. Prepaid providers could change that. “Unlike the CRA, there’s a real opportunity to build credit here,” he said.  “It’s our responsibility to get you there.”

But not everyone agrees. Prepaid consumers, Streit noted, are chronically short of cash because they don’t earn enough money and can’t find decent jobs – a dilemma that goes far beyond prepaid cards. Marketing a loan they can’t pay back will only make their financial problems worse.
“We don’t do any kind of loan product and we don’t do payday lending or microcredit and we never will,“ Streit said. “We don’t like it. The consumer gets in trouble with it, accidentally perhaps, and it doesn’t help them in the long term. If you make it easy to access lines of credit, it becomes part of the problem, not part of the solution.”

Some providers are considering other options. Peyret said one possibility for prepaid cards would be to add something like BillFloat, a program that provides small dollar loans for consumer bill payments and doesn’t exceed the FDIC’s interest rate guideline of 36 percent.

Consumer advocates, in the meantime, are urging the Treasury Department to tighten further a rule that prohibits the direct deposit of government benefits like Social Security onto prepaid cards, if payments for any loans are automatically taken out of the consumer’s next deposit.

CREDIT BUILDING?

For prepaid consumers, the saga of “credit building” encapsulates the promises and challenges of using the cards.

For the past few years, some prepaid issuers marketed credit building or credit reporting features on the cards, offering to report on- time utility, rent, cable, and other  bill payments to an alternative credit bureau. Building a good credit history is important for prepaid card holders, who often don’t have a mortgage or other traditional bank loan payment that can be tracked by the major credit bureaus. Credit reporting for ordinary bills could help prepaid consumers build or repair their credit, and improve their credit scores - in theory.

In 2005, AccountNow introduced its Credit Builder feature, a free service aimed at helping cardholders demonstrate their credit worthiness. In 2008, celebrity Russell Simmons’ RushCard launched the RushPath to Credit, which promised to report payments to “participating consumer credit reporting agencies” to create “a positive credit file.”  In a 2009 statement, RushCard said the RushPath to Credit could make a cardholder’s credit scores more visible to top lenders and “may improve their ability to obtain lower-cost loans.” The firm also said “tens of thousands” of cardholders already had enrolled.

A few other providers offered similar services, promising to help consumers create a bill payment history that lenders could see.

But RushCard and the others didn’t report to the Big Three credit bureaus – Experian, TransUnion, and Equifax. Instead, most reports went to an alternative credit bureau called PRBC, which is run by a firm called Microbilt. The RushCard also reported to a bureau run by Lexis-Nexis.

Advocates have been unimpressed, saying lenders don’t regularly access PRBC or other alternative credit agencies. “To get credit, you have to have a credit file in good standing, with all three credit bureaus,” said Suzanne Martindale, a staff attorney with Consumers Union. “We’ve never seen any evidence that the alternative credit reporting system enables people to get access to mainstream credit products.”

And not all prepaid firms joined in, especially some of the larger ones. In an interview in April, Green Dot’s Streit took an even sharper view of credit building or reporting on prepaid cards. He called it  “another big gimmick” that has hurt the prepaid market.

“To the poor single mom working her butt off at two jobs, who thinks she’s going to build her credit and get something better in her life, it’s wrong,” Streit said. “It makes no difference because nobody’s reading that reporting. It’s a lie to her.”

The credit building saga soon took a dramatic turn. The Florida State Attorney General’s office announced in May that it was investigating credit building claims on some prepaid cards, and requested more information from AccountNow and the RushCard. In July, The Washington Post reported that Microbilt was selling PRBC data collected from prepaid and other consumers to payday lenders and debt collectors.

RushCard representatives didn’t respond to requests for comment on their credit feature. But the brand’s star, Simmons, issued a statement following the Florida AG’s action, saying, “the RushCard is extremely transparent in terms of the presentation of its fees and services. All of the information is available for everyone to see on RushCard.com.” AccountNow declined comment, citing the AG’s action. A spokesman noted that that the firm already had discontinued its PRBC program.

Crystal Wright, a spokesperson for the prepaid card industry’s trade group, said issuers now are trying to develop ways to report payments to the Big Three bureaus. She didn’t know how many prepaid firms still were reporting to PRBC, but she described the situation as an example of the challenges facing a still-developing market.

But to some, damage already has been done.  An Aite Group survey in June found that 43 percent of current cardholders believe they can build credit with a prepaid card.

Prepaid cards also are so common that consumers are turning to them instead of using secured credit cards, which require a deposit and report payments to the major credit bureaus, noted Nathalie Martin, a law professor at the University of New Mexico who studies credit and financial literacy.

“People have traditionally used secured credit cards to build their credit,” she said. “Now, with the proliferation of prepaid cards everywhere, people are having a hard time distinguishing between the secured credit and the prepaid cards. The prepaid cards do nothing to improve a person’s credit. The prepaid cards are also ubiquitous, whereas secured cards seem to be less available than ever.”

Consumer groups recently urged the Consumer Financial Protection Bureau to keep a close watch on any credit building claims. “The prepaid market is on the verge of exploding,” the National Consumer Law Center said. “Practices that start small will grow and the CFPB needs to identify dangerous practices early.”

FRINGE OVERLAP

As the prepaid market grows, payday lenders, check cashers, and even car title lenders aren’t sitting on the sidelines.

During tax season, ACE Cash Express advertised that it could “cash” all tax refund debit cards – for a $3.95 fee. In Arizona, CheckSmart offered “tax time” car title loans that could be loaded onto an Insight prepaid card, said Jean Ann Fox of the Consumer Federation of America.

Among the most visible prepaid providers in the fringe banking world is NetSpend, which uses ACE Cash Express as its largest retail distributor, according to the company’s financial statement.

On a February day in Richmond, Va., I trailed Dana Wiggins, the Responsible Lending Coordinator for the Virginia Poverty Law Center, as she toured several payday and car title stores. As the state Legislature battled over whether to restrict payday and car title lending, Wiggins surveyed anonymously what consumers were told in stores about the costs of a loan. What surprised her, in particular, was the prevalence of prepaid debit cards in the stores.

At the Advance America Cash Advance store in a neighborhood west of downtown, she asked a clerk about prepaid cards, after seeing racks of NetSpend brochures inside.

“You can take out a $500 loan here, and load $300 of your loan onto the card,” a clerk offered helpfully, explaining that adding more than $300 would trigger a reloading fee. “Then you can come back and put the rest on it.”

She then added “It will make it easier to renew your loan that way, too.”

Wiggins calculated the fees for loading money onto the card ($3), using an ATM ($3), reloading it ($3).

“There seems to be a lot of fees for this,” she said.

The clerk advised her to buy something small at Walmart, such as a pack of gum, and then get cash back, without a charge for using an ATM.

A Netspend spokesman said the company distributes the cards through fringe banking stores to offer consumer alternatives to the check casher, and to reach as many customers as possible. He said he couldn’t comment on how the stores sell the cards.

Within the industry itself, providers are split on the role of fringe bankers in the prepaid market, with Mango and Green Dot once again representing opposing views.

To Streit, selling the cards in a fringe banking store “violates our covenant with customers.”

“We do think we’re a legitimate competitor to check cashing stores,” he said. “It isn’t that the check cashing store in and of itself is a bad thing. It’s a convenience and consumers need someone to cash that check for them. The bigger challenge is that checking cashing isn’t a stand-alone business. Almost all of them also do other services, like payday lending. They go together like hand and glove. And if a customer goes in there, they’ll be sold something else, like a payday loan.

“Payday loans are particularly abusive, and they’re something we don’t deal with. It’s a world we don’t want to live in.”

Mango’s Sosa, however, said that adding the cards to the fringe banking world can be a way to force check cashers and payday lenders to raise their standards, in order to compete with prepaid. That’s why NetSpend started out selling the cards in fringe banking stores to begin with. “If you go in there, you can change how those businesses operate and think about their product,” Sosa said.

There may be occasional abuses, but overall, “I would say they are embracing it, more so than using it for other predatory practices,” he said.

UNBANKED OPPORTUNITIES

Banks may have ignored prepaid customers for years, but competition for their business is heating up. The underbanked market is countercyclical, so it grows in a soft economy. Underbanked consumers also pay fees, for things like overdrafts and loans, so they provide revenue even when interest rates are low.

Minority consumers are disproportionately represented in their ranks, which has not gone unnoticed. NetSpend announced a partnership recently with Black Entertainment Television to market a prepaid card. Western Union recently struck a deal with Telemundo for a card tailored to the Hispanic market.

Tom Joyner, host of the nationally syndicated Tom Joyner Morning Show, said he decided to put his name on a card because African-American consumers have been hit harder than most by the financial crisis. Fees on his card can add up to $120 a year or so, but Joyner said that’s still a better deal than paying fees for payday loans or bank overdrafts. “We do hope to put a dent in the payday lending business,” he said.

Although the card doesn’t offer a loan product, Joyner believes the cards can be the right place to add them eventually “because we can’t get loans anywhere else. It doesn’t have to be like that.” The prepaid market has an image problem, Joyner said, but that didn’t deter him from signing on to a card.  “I think that prepaid has gotten some bad publicity, thanks to some celebrities who got into the business and had a lot of fees involved,” he said. “We’re fighting that image of these prepaid cards that have come before us.”

“As long as the prepaid cards don’t get predatory and start nickel and diming people to death, this is a great opportunity for our community to become more financially literate,” he said.

Kristin Reynolds Carpenter took out a Tom Joyner card after the $4 she spent at the Dunkin’ Donuts drive-through one morning overdrew her checking account, and led to $32 in bank fees. She also lost her job as an administrator at a medical office, along with her $40,000-plus annual salary, meaning her family of four would have to make do on her husband’s income alone.

“I couldn’t keep the minimum balance in my checking account, so that was $16 every month, right there. When every dollar counts, it starts to add up,” said Reynolds Carpenter, of Lawnside N.J.

She heard about the Joyner card on the radio, and figures she pays about half what the checking account cost her monthly. “There are a lot of cards out there, and it took me a few weeks to decide. But I’m done with banks. If I do go back, I might consider a credit union, maybe.”

Like Joyner, more players and entities are entering the market. BB&T Bank jumped in with a low-fee card. American Express also generated considerable publicity by introducing a no-fee card.

But there are still roadblocks to growth. It may be difficult for the prepaid market to create longtime financial relationships with consumers who have only a few dollars left at the end of the month. NetSpend acknowledged that it doesn’t have a large number of savings accounts holders, although it couldn’t provide specifics. And the prepaid market itself could wind up as a two-tier financial system, with some cards benefiting consumers and others offering higher fee products.

For Betty White, a prepaid card is just one piece of her complex financial puzzle. “I still have accounts all over the place,” she said. She maintains her Chase bank account. She wants her paycheck deposited to a bank, and she still prefers to occasionally talk to someone there. She tries to put away $25 in savings every few weeks. She handles most of her money online, using her UPside card.

White had a RushCard at first, but got rid of it when she had to pay a $4.95 ATM fee. She went to ACE Cash Express recently to send a Moneygram to pay her car note, and accepted a free offer for NetSpend card. She put $5 in the savings account linked to the card, and also tries to add to that. It’s not easy. She ran short recently, and had to pay for groceries by putting $100 on a longtime credit card she uses only for emergencies.

Sometimes she keeps all her money on her UPside and NetSpend cards, and nothing in the bank. A prepaid card may better than a bank account, but you still have to manage your budget. No matter where her money is, navigating the fees and cards are part of her new financial world.