Prepaid cards could be the way we all spend in future

Prepaid cards are taking the world of consumer spending by storm. They claim to help you with everything from currency exchange to improving your credit rating, and by 2010, Europeans are expected to spend €75bn (£59bn) using prepaid cards, in 2.3 billion transactions every year.

In just two years, around 5 per cent of all card transactions are expected to be through 360 million pre-paid cards, according to payment technology consultants PSE. So why are users willing to pay through the nose for the privilege of spending their own money?

Plastic fantastic

The theory behind prepaid cards is similar to electronic gift vouchers available from large high-street stores. They are activated by being "loaded" with cash and have no borrowing facilities. Prepaid cards are not linked to accounts, but look like standard debit or credit cards, and once loaded, the card can be used just like a debit or credit card to use at cash points or purchase goods or services across the majority of shops.

Most are also accepted on secure payment websites such as Paypal. The majority of the cards can be reloaded online using a debit card, with cash at the Post Office or at shops displaying a PayPoint or Payzone symbol.

Users can often swipe the card for small purchases, typically under £10, and for larger amounts, it's by way of standard chip and pin technology.

The market is dominated by Mastercard and Maestro, and prepaid card users can use them anywhere they see the signs in the same way that they would use a credit or debit card.

The cards began as a way for parents to manage children's spending from a distance, but now a number of specialist cards have sprung up alongside standard products, targeting everyone from overseas travellers to new mothers.

But the card provider typically charges the customer when they first get the card, when cash is loaded on it, when purchases are made, or on a monthly or annual basis. Some providers will charge you for replacing or cancelling lost or unused cards, or even recovering a lost pin number.

The idea of paying a company just to be able to use your own cash seems crazy, but many offer discounts and incentives that claim to save savvy spenders money and, make life easier for those without access to a bank account.

Pick a card

There are around 35 different types of prepaid card available on the market today. The original prepaid card was Splash Plastic (www.splashplastic.com), aimed at teenagers and young adults. Linked to a website, customers can get discounts or rewards up to around 15 per cent of the purchase price by shopping through the online portal. But the provider takes £1.50 every time you use a cashpoint, there is a £5 application fee, and a cancellation fee of £5 plus 1 per cent of the card's balance. Splash Plastic also charges a huge 2.5 per cent on debit and credit card transfers, and even takes a cut of 30p for every £10 you top up in cash at the Post Office.

The Oakam prepaid Maestro card (www.prepaid.oakam.com) doesn't charge customers when they make purchases or withdraw cash, but its cancellation fee is double Splash Plastic's and its other fees are very similar. Elsewhere, the Prime payment card, (www.idtprime.com), a Mastercard, offers customers a disposable, single-load card as well as a reusable card. The application fee is competitive at £3 and there is no cancellation fee, but it will cost you £1.95 to upgrade a disposable card to a reusable one, and there is a dormancy fee – charged when the reusable card has been inactive for three months – of £2.95.

Specialist cards tend to inflict higher charges, but also appear to offer better deals for users. Foreign exchange prepaid cards are particularly popular, with travellers looking for a preferential exchange rate and cash security abroad.

"While the strength of the euro is of concern to holidaymakers, using the wrong foreign exchange product can be even more costly," says Steve Willey of price comparison site moneysupermarket.com. "If you are stuck with an uncompetitive debit or credit card and don't have time to get a new one, prepaid cards can be a good option. And you don't need to worry about overspending on your holiday budget."

FairFX offers dollar and euro prepaid cards which work in the same way as a standard prepaid card. Currency is bought online and a card with the amount loaded on to it is sent to the customer. The competitive exchange rate means users get more currency for their sterling than other bureau de changes, but withdrawing cash from ATMs will cost you $2 (£1) on a dollar card, and €1.50 (£1.18) on a euro card. It costs £9.95 to buy the card, but this fee is waived if your initial load is £500 or more. There are no further loading fees, management charges or application fees, but it will cost you £10 to cancel your card.

Other choices include the Babee card (www.babeecard.com), which offers discounts on childcare shopping and can be topped up by family and friends. Transactions in the UK are free, but there is an initial fee of £14.95.

Barclaycard has gone one stage further and now offers the OnePulse card (www.barclaycard-onepulse.co.uk) in London that incorporates the Oyster prepaid travel card system, credit and cashless facilities.

In from the cold?

Aside from potential discounts and preferential rates, the big attraction on these cards is that because there are no borrowing facilities, there are few, if any, credit checks involved (some just ask for a driving licence and UK address). This means that even those who can't get UK bank accounts, because of residency or credit history problems, can use plastic as most prepaid cards allow customers to load their salary on to the card through the BACS electronic payment system.

In fact, the cashplus gold card (www.mycashplus. co.uk) could help customers improve their credit rating. The card's "creditbuilder" feature converts its monthly management fee of £4.95 into a 0 per cent APR loan of £59.40 over 12 months. That loan is then reported to the credit bureau to add a positive note to the customers credit file.

"The significance of this is huge for people who have either lost their credit eligibility or for migrants who have no credit footprint at all," says Willey. "The creditbuilder feature enables these people to show credit card, loan and mortgage providers they can regularly make monthly repayments and so build their rating at no extra cost. It helps people take the first step back to credit eligibility."

But the cost of prepaid cards could also mean that consumers with nowhere else to go, and who can usually least afford it, are being forced to pay through the nose to use their own money because prepaid card providers are not making money through interest unauthorised overdraft charges, or late payment fees, as they do with debit and credit card accounts.

The Bread card, for example, which is aimed at those trying to cut grocery costs, comes with a 2 per cent transaction fee, which is added to the total price every time you use it. The application fee and administration fee is £10, replacing the card will set customers back another £10.

There is a "cash out" fee of £10, and a card-to-card transfer fee of £1.50. Enquiring about a balance via text will be another 25p, and customers pay a premium rate of 80p per minute to talk to their card provider.

But crucially, prepaid cards are not regulated, and those using these cards are not protected. Under the Consumer Credit Act (CCA) your debit or credit card issuer and the merchant have equal liability for your product, and you can claim compensation up to £100. But this act does not cover prepaid cards. This means that unless your card offers the protection as part of its deal, you have few rights when it comes to getting your money back from a merchant that has gone bust.

"Prepaid cards are not for everyone," says Ken Howes, who heads up the Prepaid International Forum. "People have a choice about whether the benefits of having the card are worth the fees, and they are not forced upon people." But he says transparency and regulation are crucial to prevent "a Farepak in the prepaid arena".

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