Phone company 02 will storm into the world of personal finance next month, with plans to turn the prepayment card into the must-have new accessory. The company is launching two new prepaid Visa cash cards which will be backed by an expensive advertising campaign at the end of August.
With its massive customer base, 02 is hopeful millions will take up the new plastic, and if the campaign does prove to be a success, you can bet rival firms – not least the other mobile operators – will also want to get in on the action.
Cunningly, 02 is making the cards fee-free, which means it is offering a new service to its customers for nothing. But should they take up the offer, or are the new cards just a new piece of plastic to carry?
Prepaid cash cards are plastic cards that you can use to buy goods and services in shops and online in exactly the same way as you do with credit or debit cards. The big difference is that you must load up the card first, and then you can only spend the amount that has been loaded on the card. It's the same system as millions of pay-as-you-go mobile-phone customers already use.
But why would you want one? If you are a highly organised person who uses plastic cards for convenience and always pays off the bill in full at the end of the month, then you may not need another card.
But for those who find themselves going into the red every month, or are too easily tempted by a bit of retail therapy because they have a credit card on hand, then a prepaid card could be a real solution to the problem of overspending.
They've been around in the UK for some years but, until now, have been targeted mainly at people who have trouble getting credit. That's a big market in itself, with an estimated seven million people coping without a credit or debt card.
"Prepaid cards are aimed at people with damaged or no credit history, and foreign nationals that may have difficulty opening a UK bank account," explains Andrew Hagger of moneynet.co.uk. "They can also be useful to people who don't want to go over their budget, or limit their spending."
The problem up until now has been the cost of the cards. "With some cards, you have to pay an initial fee, then with some you also pay a monthly fee. The charges for ATM withdrawals, retail purchases and fees to reload the card also vary from card to card," points out Hagger. The upfront fees and ongoing charges have made many of the cards look expensive, even to the point they appear to be preying on the hard-up who may not have been able to get access to an alternative convenient way to pay.
"Some prepaid-card providers charge consumers at every available opportunity," warns Louise Bond of uSwitch.com. "These charges include: up to £9.95 to take a card out, a monthly fee of around £4.99, a charge for making cash withdrawals of around £1.50 and, as if this weren't enough, they actually charge consumers up to 2.95 per cent to load money on to the card. Even on a budget of just £200 a month, consumers will have to fork out as much as £141 a year just to spend money on some of these cards."
By launching a completely fee-free card, 02 makes it an easy decision to get one. However, it's only available to 02 customers, which means anyone else will have to stump up at least the cost of a pay-as-you-go phone and spend at least £10 every three months still to qualify as an "active" user.
But 02 hopes to widen the market to more financially sophisticated folk – even those who have multiple credit cards or bank accounts. The company has linked up with NatWest to launch two new cards, one – Load and Go – aimed at teenagers, the other – Cash Manager – aimed to help people stay in control of their finances. Both can be loaded with cash online or in stores and then used anywhere that accepts Visa, including abroad.
02 boss Ronan Dunne says the new cards will act as "digital pocket money". He says the company plans to "take a significant share" of the prepaid-card market. With around 16 million customers, the company is presumably banking on getting millions of them to sign up for its new offering. Uniquely, it will be using its mobile technology to update customers on their balance every time they use the card, to give them even greater control of their finances.
The Cash Manager card is aimed at those who need to balance essential outgoings such as rent, mortgage and bills with their disposable spending money, according to 02. Meanwhile, the Load and Go card will be offered to teenagers from the age of 13 to give them the freedom to spend online and in the high street, and to withdraw money from a cash machine. 02 says it will send a letter to the parent or guardian of anyone under the age of 16 who applies for the card and, reassuringly, the card is barred from being used in certain "adult" retail outlets and websites, such as online gambling sites.
Dunne says the card will help children learn to manage their money from a young age, which, if true, is to be applauded. He suggests parents could put pocket money on the card, giving them the freedom and responsibility to spend as they choose, but not being able to overspend.
The launch has been welcomed. Louise Bond of uSwitch says: "These fee-free cards could be the perfect solution for people that either struggle to manage a monthly budget or just want to ring-fence their spending money away from the money spent on their mortgage and bills."
Joanne Garcia, head of credit cards at Confused.com, says: "This is a breath of fresh air at a time when fees are creeping up on many financial products. O2 and NatWest are delivering a fantastic innovation with their Cash Manager and Load and Go prepaid cards, and we hope this will encourage more competition.
"We've been cautious fans of prepaid cards for some time, because the benefits have been limited to a small number of people, due to the charges applied. We don't believe people should be charged for trying to manage their money responsibly."
In fact, next month's launch is set to mark a new era for the plastic cards. Most existing cards have been aimed at particular markets, rather than the mass market.
FairFX.com, for instance, has a low-cost currency card, aimed at travellers and holidaymakers. Chief executive Stephen Heath says: "The best argument for using a prepaid currency card is that it can save people money and help stretch their holiday spending money further." He claims people can save €116 or £132 for every £1,000 of their holiday budget if they use a prepaid card instead of buying their currency at the airport.
"And as well as giving them the best return on their cash, prepaid cards offer safety and convenience for users," he adds. "The cards are mostly Chip and PIN-protected, which makes it much harder for fraudsters to clone them, and the fact they are prepaid, with no credit facility beyond that which is loaded on to the card, means potential losses are limited."
Alpesh Patel, chief executive officer at Vincento Payment Solutions, which offers the Cactus MasterCard, also points to prepaid cards coming into their own for young travellers. "The temptation to spend to excess and worry about it later is all too great for some," he points out. "This is particularly true with students and young people who are often naïve when it comes to calculating a budget. For example, the realism of travelling round the world, only to return with a credit card maxed to a limit is becoming all too familiar to many. This then leads to an inability to repay the bills, resulting in significant interest charges. And at the end of the day, it is usually the parents who have to foot the bill."
With money management in mind, there's even a pre-paid card aimed at helping people rebuild their credit record. Prepaid card company APS added a 12 month interest-free loan known as Creditbuilder to its Cashplus Gold MasterCard card last year.
Rich Wagner, chief executive officer of APS, says: "We responded to demands for financial inclusion from consumers and advocacy groups by launching Creditbuilder. It's helped customers improve their credit scores even during the worst recession in living memory when credit is scarce or expensive." "It's a good idea," says Moneynet's Hagger. "It's a quite innovative way for someone who can't get a credit card to start to rebuild their credit history."
While 02's new deal won't do that – it's just a prepaid card, it can also offer help to people struggling with money management. Other companies will watch the launch with interest but consumers will be hoping that others follow suit with similar fee-free offerings.