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A new and much improved prepaid card

American Express is banking that its new low-fee card will be a game changer in the prepaid card market.

By MSN Money Partner Jun 15, 2011 11:07AM

This post comes from Seth Fiegerman at partner site MainStreet.


American Express has launched a prepaid debit card in what the company claims will be a "game-changing move" that brings prepaid cards into the mainstream.


The card, which can hold as much as $2,500, charges no activation or maintenance fees, with the only fee being a $2 charge each time users withdraw funds from an ATM. There is also no charge to reload the card, the money does not expire, and it is protected in case the card is lost or stolen.


By comparison, even the best of existing prepaid cards generally charge users high fees, whether it's the $9.95 activation fee for the Wired Plastic Prepaid Visa or the $5 charge consumers face when they don't reload their Mango Prepaid MasterCard with at least $5 every month.


These common fees, along with charges for everything from requesting paper statements at the end of the month to canceling the card outright, have generally given prepaid cards a bad reputation, something American Express hopes to change.


Best in class

"We believe giving consumers freedom from fees with a best-in-class option from American Express will set a new standard for the $36 billion open loop U.S. prepaid industry," said Dan Schulman, group president of American Express' Enterprise Growth Group.


Indeed, now may be the time for a resurgence of prepaid cards. Traditionally, these have been popular among adults who may not qualify for a standard line of credit, but studies have shown that many consumers rely more on debit than credit since the recession, with the goal of paying more up front rather than running up debt. Many students also sign up for prepaid cards because they face new restrictions on the credit cards they can get due to the Credit Card Accountability, Responsibility and Disclosure (CARD) Act passed in 2009.


The demand is already there, and the supply should therefore increase as well. As our sister site The Street reports, new government regulations limiting the swipe fees card issuers charge merchants do not apply to prepaid cards, meaning more banks may begin pushing out these cards to compensate for lost revenue.


That said, just because prepaid cards may become more popular doesn't mean they are good for everyone. Aside from all the fees, these cards do not actually help consumers build up credit, and the funds placed on the cards earn no interest. So unless you're in particularly dire financial circumstances, traditional credit cards may still be the way to go.


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