Prepay credit cards: Costly way to pay?
Prepay credit cards are now flooding the market, with more options for those locked out of banking to be able to carry a Visa or MasterCard. But what do they offer and are they really value for money?
Daniel Barnes looks at pitfalls and gains of prepay cards - and if the charges are worth the service.
Prepay cards have sprung on the market over the last few years, primarily aimed at those unable to access traditional banking such a migrant workers or those with basic bank accounts and cash cards but without a Visa or MasterCard symbol, so they cannot be used for payments, either in shops or online.
Instead of borrowing money - as with credit cards - on a prepay card, you load money or credit onto the card and then spend, much the same as a pay as you go mobile phone. Once the cash balance is spent the card cannot be used.
More cards to hit the streets
The recession could be make or break for prepayment cards, as banks move into providing cards because people want greater control of their money, predicts Kieran Hines, cards & payments analyst at Datamonitor.
He explains consumers looking to budget will be turning to cash, and card providers are likely to push prepaid cards to ensure their hold onto revenue. Meanwhile those struggling with debts may find credit cards are no longer available.
"In a real sense, this is the time for prepaid to show its worth," he says.
Lewis Findlay, chief executive of Hertford International, which recently launched the Eclipse card, expects the growth of prepay payment cards to match pre-pay mobile phones.
"The main driver is that people have no bank account, but also migrant workers who may have a bank account but are limited to a Maestro card, which is not accepted online or at some retailers.
"People also choose them as a security measure too against ID fraud."
He explains if fraudsters get hold of your card details - although you can a refund for losses from the bank - it gives them access to your credit limit, or all the cash in an account up to the overdraft limit.
"On a pre-pay card the maximum limit and how much criminals can get their hands on is how much the recent load was."
Charges
There are pitfalls to prepay cards and and the biggest snag is the charges.
On a debit card, it costs nothing to use, while on credit cards charges only usually come on withdrawing cash and interest if balances are not cleared each month.
However, with prepay cards, users can be charged for getting the card in the first place, putting funds on a card, charged for using the card to withdraw funds from cash machines, and charged for spending.
Charges for shopping are also not uniform across the market. Some cards charge a set percentage per transaction - meaning use is expensive on big ticket tickets, but cheaper on day-to-day small purchases.
Meanwhile others charge a set fee - meaning on lower price goods the cost is high, but not on expensive goods.
Providers also offer contracts where a set fee is charged monthly or weekly and no charge is levied per transaction.
Hitting lowest paid hardest
Prepay cards have faced heavy criticised for coming at a major cost for those on low incomes, for which the cards are aimed at.
Colin Loubser, director of sales at Tuxedo Money, explains only one in five of the Tuxedo card holders are those who cannot get a bank account.
"We are absolutely transparent about charges. We have tried to mitigate charges and not rip customers off," he says.
"On the pay-as-you-go card there is a capped fee at £1.50 - not rising with use - or a pay monthly option where the fee is £1 a week."
However, providers maintain their card charges are clear and they have to levy some charges, as without the interest credit card providers earn, providers have to make a profit.
"On ATMs and cash withdrawals we charge on cost," Mr Loubser says. He called on machine operators to lower there fees and predicted if prepay card use increases fees will fall.
Mr Findlay explains many of the charges are passed on because of the fees the providers have to pay, for example to Paypoint, when topping up cards or charges for cash machines.
"There is no charge on Eclipse for topping up at the Post Office - although it takes 24 hours for the funds to appear," he says.
"At Paypoint the funds appear immediately, but there is a fee. Paypoint charge us and we pass it on, but we don't with the Post Office."
Grant Bather, from Virgin Money, which also runs a prepay card, explains the firm is upfront with its charges and giving access to internet shopping can save people money when they are usually unable to pay online.
"For cash points, we charge. But cards are not expected to be used in cashpoints. If you salary goes into a card then yes, but if you were paid by cheque, cheque cashing charges are high."
Are purchases protected?
Credit cards offer protection if a firm you are buying products from goes bust.
Under the Consumer Credit Act, the retailer and the credit card provider and jointly liable should goods not arrive - and often it is easier to claim back money through a credit card firm than the retailer.
However, prepay cards offer none of this protection. If you buy something online and the firm lets you down, there is no turning to the card provider for your cash back.
Only Visa prepaid cards offer consumers protection, as it does on debit cards.
Mr Loubser admits no protection was provided for goods purchased through Tuxedo, but the firm had a low cost insurance service in the pipeline to provide cover.
Security of funds if a firm goes bust is also a concern in the credit crisis, which has seen those thought to be impervious hitting the rocks.
Funds on cards are not protected as savings accounts are under the Financial Services Compensation Scheme run by the Financial Services Authority.
And there is some confusion over where protection does lie - if any - for card holders' money, as funds pass between many different sources. Meanwhile, some card issuers themselves seem not to be clear on definite protection.
Mr Loubser explains there was a web of funds moving around behind the scenes, but explained at Tuxedo, at least, for funds to be lost the highly unlikely situation of Newcastle Building Society or Mastercard would have to go to the wall.
He explains all funds loaded are paid directly into a client account held at Barclays Bank and administered solely by Newcastle Building Society.
"As MasterCard requires 100 per cent cover for all funds held on prepaid cards, funds are swept daily from the Newcastle account into the MasterCard Client account at HSBC Bank," he says.
"Effectively, therefore MasterCard holds all funds and in the unlikely event of a default by Newcastle, the card programme would be transferred to another Issuer under the same arrangement. The customers funds remain fully protected in this way."
Budgeting and travel
A further area where prepay cards are coming to the fore is for travelling.
Parents looking to give children heading abroad access to funds on gap years are turning to cards, along with general holidaymakers not wanting to use their bank cards abroad or be absolutely sure about the charges will will face for using a card in an overseas cash machine.
"If a child is on a gap year, many people give them dad's credit card if they get in trouble. But giving a prepay card allows them to have an empty piece of plastic that can be topped up if they run short of cash or need funds in an emergency," Mr Findley explains.
He say Eclipse also offers a dollar card - so those travelling abroad can budget and know what charges they will face when withdrawing money and spending as well as protect their card details.
Sending money abroad for those working in the UK but with family abroad is also a growth area for cards - as more than one card can be had on a single account, with one card used to put cash on and the second used for spending.
Mr Loubser explains it was a profitable area - but growth was held back as many countries where using prepay cards to send money abroad would be popular do not have the trusted postal service to send cards or use cash machines, "but this is changing".
"One of our growth areas is the Zimbabwe-Botswana border, not that we target it anyway."
Cards can also help with budgeting in the UK.
"It is also of use to people who want to be disciplined with their spending and budget," says Mr Findley.
"If you are going out planning to spend x over the weekend, you can always go back to the cash machine for more. With a prepay card you are limited."
Protecting details
Shopping online is a concern for many. If a prepay card details are stolen, only the funds charged onto the card can be accessed.
The same applies if a card is stolen.
For those using a card on sites they are not certain of - a prepay card could add a little more confidence.
"People also choose them as a security measure too against ID fraud," says Mr Findley.
He explains if fraudsters get hold of your card details - although you can get a refund for losses from the bank - if gives them access to your credit limit, or all the cash in an account up to the overdraft limit.
"On a pre-pay card the maximum limit and how much criminals can get their hands on is how much the recent load was.
"A card is also safer than cash - as if it is lost or stolen it can be replaced."
For those using a card on sites they are not certain of - a prepay card could add a little more confidence.
He also suggests those who gamble online would benefit - as they could limit their spend - while users of online pornography may prefer the card so as not to hand over details their main card to unknown websites.
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