The Truth About Prepaid Cards

44 | By Shah Gilani

It’s hard to believe how destructive Hurricane Sandy was. That witch (switch the w to a B, if you like) was wicked.

We are far from out of the woods, especially if the weather turns much colder.

Everyone is doing what they can; of course it’s never enough at times like these. But, we’ll get it done, together.

God bless all of you (you know who you are: Tara, Mary, Barney, all the firemen everywhere, especially you, Johnny, pulling people from burning homes in your bare feet, all the policemen, emergency services people, the innumerable other workers, friends, neighbors, and strangers) who make America what it is, the greatest country in the world.

Now, onto something that’s got the potential to undermine our financial future…

It’s about those prepaid cards, and the games that are being played with them that you may not know about.

Prepaid cards have lots of benefits, especially for the “unbanked.” These are the people who more or less may live paycheck to paycheck, or don’t have jobs but need a “card” because both credit and debit cards are how we pay for most things these days.

A lot of people are rebelling, and rightfully so, against the higher and higher fees that banks are charging on checking accounts (and for all their other “services”) and are turning to prepaid cards as an alternative means of paying for goods and services.

Now, American Express is partnering with Walmart to offer Bluebird cards. The cards are being pushed through Walmart stores and are ostensibly backed by American Express.

American Express? As if it’s a bank. Wait a minute…

It is a bank.

That’s because back on November 10, 2008, at the height of the credit crisis, American Express had to become a bank (actually a bank holding company) so it could take money from the Federal Reserve to stay alive. You forgot that, didn’t you?

And Walmart, well, they have been trying to become a bank in several end-around ways.

Now, they’ve come together. The “bank” status of American Express and its 100-year history of issuing Travelers Checks (the first prepaid cards, really) and the marketing power and reach of Walmart, into the pockets of the less than wealthy and notably underbanked, has yielded a Bluebird capable of flying in the face of safe banking.

There are lots of problems with the prepaid card game. My biggest problem is that there are plenty of fees attached to these types of cards. They’re NOT free. A lot of the time folks aren’t even aware of the fees they’re paying. They just know that bank fees are higher, or at least they think they are higher, which most of the time, they are.

Then along comes Bluebird with its no-fee prepaid cards. Sounds good, right? It is for now. But, mark my words; there will be fees down the road.

So, why are American Express and Walmart partnering to offer free prepaid cards that they hope to eventually become a lot of folks’ new checking account-type service?

Because they get paid “interchange” fees every time you swipe one of their Bluebirds.

There was just a law passed that broke interchange fees (the fees that merchants get charged when you use a card at their establishments) into different categories, with different costs per swipe, depending on the type of card (credit, prepaid, debit) you use; and guess what end of the interchange fee structure the no-fee cards will feed off of?

Of course, the Bluebird card will garner the highest interchange fee. That’s where they (American Express and Walmart) will initially make their money. That is, until millions of customers and consumers start flying high with their Bluebird cards, then they’ll inch into more fees.

Oh, don’t worry that Walmart is paying the higher interchange fee (if you caught that). Not only will they eat off American Express’ plate of those fees, they will pass along the higher interchange fees to their loyal customers, the ones who go there for low prices all the time.

The whole argument for lowering the interchange bank fee monopoly in the first place was because higher fees were being passed along to consumers by the merchants who were being charged by the processors and banks. See how some things come full circle? Or as Dave Mason sang, “It’s Like You Never Left.”

But, that’s not my problem with these prepaid and new-fangled bank-alternative cards.

The problem is that the money you use to pay for your card, which goes to the card company, isn’t insured. There is no FDIC insurance on the money you give card companies, on the money sitting there that you haven’t spent by swiping your card yet.

They could go under. American Express was closer than you think. And you don’t think it could happen again?

What will happen if that happens? Will the government bail out all the prepaid card companies, most of whom aren’t banks? Will the Federal Reserve bail them out, like it did American Express?

Where are we going with this?

It’s frightening because people don’t know. There are no answers right now.

There is only one thing for sure, where we’re going is ineluctably towards another cliff.

Why? Think about it. Comment here about what you like or don’t like about prepaid cards and where you think this non-bank, uninsured depository scheming track is taking us. I want to hear from you.

And, next week, I’ll tell you the rest of what you don’t probably know.

44 Responses to The Truth About Prepaid Cards

  1. Martin says:

    It’s another way to enrich the greedy – that’s what I think (well, you did ask what I think, or did you forget that?!)

    • Al says:

      It helps the greedy.
      Also it shows who the suckers are!
      Like PT Barnum supposedly said, there is a sucker born every minute.

  2. Hans says:

    I like the Starbucks app you download to your iPhone and just scan when you’re in line. Does that count as a prepaid card?.I think you’ll see more and more of those in other merchant’s ammo.

  3. Jerry Collins says:

    One time I had a prepaid MacDonald’s card I could swipe for a hamburger. When the card ran out of money, I paid the clerk $50 to recharge my prepaid card. The clerk fumbled with it, and called the manager over. The manager loaded my card and handed it back to me. The next day when I went to use my card there was no money on it. You see the problem is I cannot read the magnetic strip. So I lost my $50; and I suspect there have been another million victims of this same error.

  4. Peter says:

    This is merely another example of unconscionable actions that furthers the ubiquitousness of injustice, which is bringing our Structure known as Democracy down.

    Our structure of Democracy could handle the Evil of injustice when communications and thus control were not all pervasive..

    Capitalism is the only structure that follows Gods structures, thus it is the most successful.

    When God’s structure gives knowledge, for every grain of knowledge received, a equal grain of responsibility goes along with this knowledge,

    Our Democracies has accepted God’s knowledge, which we earned but rejected the responsibility that goes along with such knowledge.

    This is why injustice reigns supreme and why our structure will self destruct.

  5. Alan L says:

    If people would only realize that credit is a tool of each individual country’s governmental control system.
    If you look at any ‘official’ statement or bill, (as in governmental system or state utility), your name is always printed in capital letters and never in the standard caps and lowercase lettering that you signed up with originally.
    If this doesn’t bother you in the least, then you don’t realize that the govt/agency owns your name in that capital letter form and then gains legal abilities against you in the form of applicable fees and taxes, which they couldn’t do otherwise, legally.

  6. erich k says:

    I prefer credit cards over the rest for insurance and security reasons. Realizing that not everyone qualifies I suggest loading cards with only minimal amounts at a time, so the risk is managed.

    • GetMikey says:

      Absolutely! Need to use a prepaid card? Go buy prepaid card, load with amount required for needed purchase, spend entire balance of card in single transaction, throw (now empty) card away or shred.

      What insurance? They’d have to go belly-up in about 25 minutes, the time between a card purchase and the time the money’s actually spent. Much lower risk.

  7. H. Craig Bradley says:

    People should get used to having a bit more cash on hand for everday items. Call it a “petty cash” fund. In fact, when I worked on the White River Nat’l Forest in Rifle, Colorado in 1980-1984, we had a “petty cash” fund on the Rifle Ranger District for that exact purpose. It makes alot of sense for an agency or individual. Its immediate. Its direct. And yes, cash is free.

    The alarming thing is where we are headed. You see, prepaid cards are only part of the picture. The bigger trend appears to be the emerging practice of making a deposit or purchase right from your cell phone. Just photograph your check and you can make a wireless bank deposit. Pretty soon, those expensive “cash houses” and tellers the big banks pay for will look mighty unprofitable.

    U.S. BANKS may eventually close alot of branches. We will become increasingly “cashless”, doing our banking on- the- fly. This will make us very vulnerable, more so than prepaid cards would. We need cash to allow us to keep our options open and deter unwarranted snooping by the government.

  8. gary says:

    The crowd that will use this card also use the check cashing and Pawn shop services. So a percentage here or there is nothing like the criminal charges of the aforementioned services. I think the assumption that they have targeted the banks is off base, they want to give the low end consumer services a run for their money. Walmart, now ours the

  9. Victor says:

    Shah, really enjoy your articles and I get your points here but a few thoughts: Aren’t the prepaid cards for the people who can’t get debit or credit cards (for whatever reason)? If so, isn’t the prepaid card then “better than nothing”? Also doesn’t the consumer have a choice to just pay cash for most things (other than hotels and airplane tickets)? In this case isn’t the prepaid card like any other purchase? In other words, buyer beware. Just some thoughts …. Keep up the great work! Victor

    • doug profitt says:

      Victor. “better than nothing”??? he needs to have cash to buy these cards. The consumer does not see the fee. The merchant does. Then the merchant raises prices to compensate. Ultimately, all consumers, even those using old fashioned folding money, pay through higher prices, not just on bluebird cards, but all sales
      . These fees act the same as a hidden tax, and the consumers/voters have no say at all.

    • Doris Kelsey says:

      You generally can’t cash your paycheck without an account with at least that amount already in it. Often, if you deposit your check, you can not withdraw any money until it ‘cooks’ for 5 days. For people living check to check, a bank checking account is impossible to maintain. A savings account would do so one could cash their check, but few of the truly poor have savings. I know, hard for most of Shah’s readers to imagine, but true. In fact, people on SSI are not ALLOWED to have more than $2,000 in savings (and a second vehicle is part of that 2K). So, if you have a $1,500 second vehicle, you can not save more than $500 to put towards your property taxes or insurance! It is to keep the poor poor, where they belong.

  10. Malcolm Fletcher says:

    I usually agree with your sceptical views but I am not sure about your take on Amex/Walmart. I was surprised that Amex decided to go so down market which might well affect their image. However, they are going where the money is, perhaps big time.
    I don’t like lending money to any bank or semi bank and would never dream of using a pre paid card.
    But such cards are good for those who can’t manage their money; are they not? Or, can Amex, instead of ‘bouncing’ amounts in excess of the amount on the card, charge a fee? I think not. So how are the poor people using such cards disadvantaged, except by any price increases that Walmart might make?
    Oh yes, is Amex goes bust they would be but we all know that Amex is TBTF

  11. Brian Riordan says:

    I have only one credit card I have maintained since 1969. It has kept me out of more trouble than it has gotten me into. Now, the bank has issued a Client Card by force, but, I only use it for the bank transactions. I forsake all others and this works for me.

  12. Greg Boger says:

    You are correct that Amex should have some LARGE required capital reserves to cover for a “run” on the prepaid cards they issue.
    However, your point that fees may go up on the cards strikes me as somewhat “nanny state” in nature. So what if they go up? Can’t people read? Let the buyer beware.
    Besides which there is NOTHING keeping those people from using either cash or paypal to pay for things. Walmart charges very low fees to cash paychecks, a point you left out.
    The fact that they don’t “realize” that fees go up is similar to the argument that people didn’t “realize” they couldn’t afford the house they shouldn’t have been buying in the first place.

  13. Joseph p bell says:

    JUST when we thought /think/ thunk ,we were safe . OH, my GOodness . Dear Mr. Shah ;Doctor ; have you ever heard of the PUBLIC BANKING INSTITUTE ,and their attempt to help States run old Fashion publicly owned banks .. ELLEN BROWN try googling her ,but keep your hands to your self . I have the first claim (and at 78 , i won’t have to many more chances . BLESS YOU AND YOUR COLUMN

  14. Michael says:

    This is the latest in a wave of “low, or no Fee” cards to come out of the “Creative Marketing Departments” employed by Banks as Financial Consultants to find them ways of boosting their quiet money fee’s…
    My business is importing and selling Vintage Guitars. I buy in the US and import to NZ. I regularly deal with International Transfer of Funds for the purchase of the Instruments. I have Bank accounts in NZ and the US. When I transfer funds from one account to the other, first, I’m charged a % fee by both Banks, I can live with that because I can cover it through “Cost of Sales”. The funds, when sent, ALWAYS arrive short by and additional $25.00USD though – it’s always outside the fee’s and there is no paper trail to track who’s Hoovering the extra $25.00??
    Neither of my Banks can explain where the money goes or are willing to suggest anything! I have pursued this issue for over a year with both of my Banks and have discovered that there is no such thing as a “Direct account to account Transfer”. Apparently, there’s a Rat in the woodpile between Banks that do the processing. They sink their teeth into every International Transaction and extract a $25.00 fee, but there is no record for the transaction.
    Naturally, neither of my Banks are able to explain where the money went, nor are they willing to “recover” the $25.00 secret fee! All they tell me is “all Banks charge fee’s and it’s up to me to decide to transfer funds and accept the fee’s”.
    This has cost me over $600.00USD in the past couple years and I’m still completely in the dark about who my silent partner is with the Hoover!

  15. LITM says:

    Prepaid cards are based on our own money, why should there be any charges except for the cost of manufacturing the cards, they should be regarded as CASH AND NOT AS IF THE COMPANY IS ADVANCING ANY CASH from an overdraft or margin account.

  16. H. Craig Bradley says:


    You do have to be careful not to draw attention to yourself. Any deposit of $10,000 or more may result in the depositary institution filing a “suspicious activity report” (SAR) with the U.S. Treasury Dept. Get too many of them and a Federal bureaucrat could just arbitrarily decide to freeze your account ( just alledge you are a terrorist sponsor or something).

    If you attempt to transport $10,000 in cash, even for a legitimate purpose (for example, to buy a used car), you run the risk of law enforcement deeming it “drug related” (illicit) and confiscating the cash from you during a “routine” traffic stop.

    To get your money back requires a lawyer and maybe up to two years of civil litigation. In the meantime, you don’t get paid interest from the jurisdiction that took it. If you keep alot of cash at home, you could experience a home invasion (armed burglery). Bad guys know and look for homeowners who keep lots of cash around. Usually don’t end well either.

    Moral of the story is we live in an increasingly dangerous and uncertain world. Almost everything we know is potentially in play and could change at ANY time. For example, one night you go to be and exchange rates close at normal levels. The next morning you wake up and the Hong Kong dollar (or some other currency) has been unpegged from the U.S. Dollar and appreciates +25% against the U.S.D. Inflation could be 20% by the week’s end and interest rates spike to double digits. Suddenly, you need alot more money. Banks don’t have it. Dangerous world. It will become alot more risky if President Obama is reelected too.

  17. Kevin Donnelly says:

    Up from the Street, in cathedrals
    of glass,
    The Gods of Finance Play
    Adressing the Boards, they lay it out,
    “more money for us” they say
    A Pre-paid Card is a simple swipe
    That can take us to the Top
    And there’s no place else that we can rest
    Until we prove that we are the best
    -And there’s no other God but -me.

  18. ASHLEY GOODMAN says:


  19. allan h (from aus) says:

    The underbelly of capitalism and free enterprise is not pretty. An answer? An alternative? I cant see one. In nature, evolution has always been shaped and ‘managed’. Not by laws, NO! By survival of the fittest!!
    Civilisation is trying to care for the careless, give to the ‘have nots’ by taking from the careful & taxing the haves. The result? Overall weakening – more fodder for the serpent with the underbelly.

  20. Spartacusstoo says:

    Ah, he poor lemmings! Over the cliff!

    Of course there is the one sure thing for now anyway…it is called cash.
    If you have the cash to buy the card then why not use the cash to buy things with? Am I from a different planet or something?

    My wife and I use credit cards and we always carry two in case one gets denied becuase the card company thinks smething fishy may be going on like an illegitimate purchase. Now we use our cards as cash cards, that is we pay off the balance at the end of the month, No credit, thanks.

    The card companies don’t mind us doing this as the merchants have to pay the fee, not us. Rarely, and I do mean rarely a merchant will charge the fee to us, in which case and most probably we simply don’t buy. So much for that. Which is to say, you should never buy if the merchant wants cash for a number or reasons. First is to say that the merchant can always incluse the fee in his prices…no problem with that and further you have a transaction record which you may not get when paying cash on demand. Thus the merchant may be “kiting” on taxes and they don’t need to be encouraged to do that.

    Recently, at a local gas station, the attendant said “sorry, your card was denied”. I knew the card was not denied but he wanted the cash for the transaction without providing a cash register receipt. Well, that was the last time he got my business.

    In fact I tell my kids and grandkids to have cash at home at all times in case of an emergency like Sandy or worse. I think an amount of cash at home that can carry you for at least two weeks for food, fuel and other things like medicines is a must.

    • Malcolm Fletcher says:

      I also carry two credit cards (one is an Amex used for over 40 years) and do the same. Pay on line on or before the due date, so never ever a fee, except for 3 years in The Netherlands where Amex insisted on charging all customers $300 pa ‘membership fee’ They nearly lost me over that but complaints eventually produced a ‘complimentary refund’……
      A pre paid card, as I said before, is good for the unbanked or for those who don’t trust themselves with a credit card.
      Maybe better than cash as if lost maybe a refund might be forthcoming…..not read the fine print but Shah probably knows the answer to that question?
      btw Amex is TWCTF if not TBTF. (too well connected)

  21. Albert Bentley says:

    How can we be forced to pay for things which
    we did not elect to pay.
    Is big greed on the loose backed by legal jumbo munbo?

  22. RickB says:

    Sooo… yet another way the 1 pct is sucking money from the rest of us. And who believes Amex has cut back its political contributions and lobbying efforts, reducing its chance of getting a bailout, when the time comes. Hell, this would be an easy bailout to sell: by-passing Main Street, even, bailing out “consumers”

    American consumers probably aren’t aware of the advantage that deposit insurance (DI) provides. (Surely, some of Euro zone problems stem from lack of EU-wide deposit insurance.) Wal-Mart customers will likely accept the new card without considering DI.

    As for AXP… lower overall delinquencies and higher loss reserve coverage of delinquencies (about 3X peer coverage ratio)… ROA over 4 pct at the two banks Amex owns – compared with 1 pct for its bank peers… why not buy AXP?

    FDIC will also be collecting DI premiums as a percent of “average consolidated total assets” minus tangible common equity. No longer based on deposits, this will raise the cost of DI for the largest institutions and favor smaller banks/thrifts. Do you think consolidation is ahead for smaller banks/thrifts?

    Why shouldn’t we buy small banks/thrifts with large holdings of what the Fed said it will buy: MBS? Or large holdings of RE loans that could be securitized? Or will the Fed buy strictly from its primary dealer cronies?

  23. Hayrick says:

    The public is under attack everywhere. What about covered bonds!
    The Government here has changed the rules and now banks in Australia can raise money via covered bonds. So depositors get pushed down the line and the Government guarantee (lately reduced – is this a coincidence?) becomes more necessary. The trouble is that the guarantee does not specify WHEN the depositors money will be returned – no doubt the banksters will be first in line again. It seems government prefers people to be dependent on weekly payouts as then compliance for any perceived infringement of nannies instructions (even if unrelated) can be enforced by swinging fines and reduction or withdrawal of payments – this is already a public policy being used in Australia.

  24. Edmund K says:

    Frequently “rebates” for products are issued using these cards, what is the advantage of this for the issuer?

  25. terry l. thomas says:

    Well, leave it to the bankers and lawyers to find another way to shaft the American people. There is no law that is passed that a lawyer and/or banker could not figure a way to circumvent or bypass it completely. Put a banker and lawyer together and they make Willie Sutton look like a teenage prankster.

    The only way this is going to change if for the “regulators” be required to enforce and prosecute these people to the FULLEST EXTENT OF THE LAW AND THE JUDGES TO SENTENCE THEM TO THE MAXIMUM TIME OF IMPRISONMENT AND FINES ALLOWED BY THE LAW.

    P.S. – As far as prison time goes, I certainly do not mean the tennis clubs locations, but full scale prisons like Leavenworth, Alcatraz (which is closed) or even Marion, Il. maxiumum security.

  26. Sailor Jo says:

    It is fascinating how some people believe they need a card. It seems to me that is the result of the brainwash done by financial institutions. That is part of the (un-)culture of living on debt. People need to relearn to tighten their belt and buy less than they can afford. That extra money, no matter how little, sets them free.

  27. Hawk 121 says:

    Lack of tranparency: In the beginnining there was a practice called “sound banking”. Banks wanted their loans repaid, so they did due diligence on loan app’s. But there were locations where loans were less likely to be repaid, so banks were less likely to lend there. The process came to be known as “redlining”. Since those locations tended to be minority neighborhoods, redlinining was called “racist” by activists, and the politicians basically outlawed the practice. Then came Clinton’s “Affordable Housing Act”, aided and abetted by by Republican political whores. That allowed people who could not afford homes to buy them. Federal “semi-private” agencies guaranteed the mortgages, which gave clever investment bankers the ability to aggregate bad, but “guaranteed” mortgages into “mortgage backed securities”. Normal protection against this kind of debt garbage went under the bus when the rating agencies were “persuaded” to give the highest debt ratings to MBSs. That allowed the MBSs to be sold to banks and other institutions (e.g., AIG) who would not otherwise be permitted to buy them. And those banks and institutions bought the hell out of them. Was any of that transparent to the public? Hell no. Then the truth came out, and loan liquidity, the life blood of American business froze. Welcome in the Second Great Depression.

    The banking scheme between Wal-Mart and American Express is different in substance, obviously. But the game is analogous as is the lack of transparency. Prepaid cards are in their infancy, but carry the same stench as the MBSs.

    The DC whores blame Wall Street for the Second Great Depression, when those DC hypocrites were its actual genesis. The only thing you can expect our political whores to do about prepaid cards is nothing. As Reagan said about Carter, “Here we go again.”

  28. Al says:

    The fancy new phones and cards that can be used by tapping or NFC or putting near the payment can be ripped off. I know of a guy that was charged twice for something and he was only there to repair something else. The bank wanted to know why he tapped. He had to explain that it was in his back pocket while he did repair work near by.. They did reverse the two charges, and it was a hazzle to reverse. No local reversal of charges.
    Bottom line: watch out for the tapping cards and phones. And as the article talks about. the prepaid cards for me nice, but i want to stay far away from them also.

  29. GetMikey says:

    Dear Sir,

    Your premise is somewhat flawed. Netspend, one of the major companies behind quite a few of the prepaid cards out there, IS a bank. And their card IS FDIC insured. They act like they’re not a bank, but according to their website they are . . . or at the very least they are FDIC-insured.

    So if this AmEx/Walmart card is NOT FDIC-insured, it’s not likely to last long, or at the very least will have a tough time in the marketplace.

  30. Joe says:

    Unfortunately, some of the people who cannot afford a bank account also are not aware of what they are buying, and don’t know the questions to ask. All they know is that they have a card to use so they can by stuff, just like others.

  31. David Alexander says:

    I can’t for the life of me fathom why someone would go into Walmart with $100 in cash, go to a kiosk, counter, pseudo ATM, or whatever, then convert that cash into a card, then go shopping. I just don’t get it.

  32. Kevin Beck says:

    I had a thought about using one of these cards, just to intentionally be slightly outside the banking system. But I will point out that Wal-Mart offers their Money Card, and it purports to be a low-fee way of banking. But that card charges you $3 to add money to it, and an additional $3 a month if you deposit less than $1000 a month to it!

    I think Wal-Mart and American Express are currently using the card as a loss leader to build a customer base; then when it reaches critical mass, the fees will be instituted.

    Thank you, Congress, for restricting the ways banks can make money from us. You scum have just found a way to make sure they charge everybody, instead of just those that use the specific services that used to have their own fees.

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