Prepaid spending not on the cards

22-KARAT FEES: US parents were warned about the Kardashian Kard and other prepaid debit cards that burdened cardholders with "outrageous" fees.
22-KARAT FEES: US parents were warned about the Kardashian Kard and other prepaid debit cards that burdened cardholders with "outrageous" fees.

If American reality television stars the Kardashian sisters can be relied on for anything, it is knowing how to shop.

So a 2010 addition to their merchandising empire - a pre-paid spending card - looked sure to be a money-spinner.

A little too much so, as it turned out.

After barely a month the costly cards, aimed at teenagers and young adults, were pulled from the shelves after Connecticut Attorney General Richard Blumenthal questioned their "pernicious and predatory fees".

So what should New Zealanders make of pre-paid cards here?

One lasted two years before being pulled from the shelves.

Of the others, Kiwibank's Loaded Everyday looks cheap by Kardashian standards - $36.50 to buy and own for a year to the Kardashian Kard's US$99.99 (excluding load fees).

(And yes, they spelled Kard with a K).

Westpac's prepaid Visa is $20 with no ongoing fees but costs $1 each time to load.

Not so outlandishly crazy, then.

The Fundzi children's card, at $59.40-$81.35 a year plus 20c per transaction (after the first 10) is more at the Kardashian end of the price spectrum.

But are they useful?

Here is the sales pitch. Prepaid cards provide the convenience of a credit card for people who don't want one, or for children, or people with bad or no credit histories.

They are not linked to a bank account, so the money at risk is only what you load on the card.

This protects people from impulse shopping, which appears to be the reasoning behind a government initiative to issue prepaid cards to be used at approved stores by teenaged beneficiaries.

Here is the part that is not always in the sales pitch: The lack of bank links can make them alluring to money launderers. As explained in this PR-deflating passage from the United States Treasury Department, ferreted out by the Government Accountability Office:

"The 9/11 hijackers opened US bank accounts, had face-to-face dealings with bank employees, signed signature cards and received wire transfers, all of which left financial footprints. Law enforcement was able to follow the trail.

"Had the 9/11 terrorists used prepaid cards to cover their expenses, none of these financial footprints would have been available."

None of this has held the cards back in the United States, where banks reportedly started to push them after debit card fees were capped.

New Zealand may be a different story.

Our eftpos-happy nation makes it very difficult to survive without a credit or debit card, says Massey University banking expert David Tripe, and almost everybody here has a bank account.

In the US, the "unbanked" have trouble cashing pay cheques, and those without credit cards must often rely on the likes of Paypal.

Here we have other options. Like debit cards, which have already claimed the scalp of one bank prepaid card.

The target market for National bank's iCash card was pretty much usurped by Visa Debit when the iCash was but two years old, according to a bank spokesman. It is no longer offered, with only a small number of active cards remaining.      

That leaves Westpac's prepaid Visa and Kiwibank/Post Shop's Loaded Everyday.

(This is not counting the oodles of prepaid gift, loyalty and travel cards, which are not pitched at everyday New Zealand spending.)         

So who might use a prepaid card here?

Online gamers, mostly, says Kiwibank's brand and market manager for payment products Nikki Roberts, along with other kinds of online shoppers.

It is surprising how much people spend on Facebook games such as Farmville, she says.

Online shopping and gaming are followed (in no particular order) by airfares, accommodation, supermarkets and restaurants.

Roberts reels off a list of the people who like them: the budget-conscious, those too young or credit-risky to obtain a credit card, and those who fear giving out bank details over the internet.

Of course, banks will usually wear the risk of online credit card fraud, as long as people follow security rules. But Roberts says some people don't know that.

Then there is the pocket money market. Overseas money writers have suggested that parents could use prepaid cards to teach children and teens about budgeting. Anyone over 10 can get a Loaded card (with proof of identity and home address) and Westpac sets the age bar at 13 years. No bank account is required.

Roberts says Kiwibank wondered if Loaded Everyday would survive the rise of debit cards. But they have met their sales targets every month.    

Still, Tripe, a seasoned banking watcher, sees prepaid as a niche product, with the risk of added fees for all but the most disciplined users.

"I don't think they're incredibly well explained," he says. "People will wind up incurring significantly more fees by using them than they would have otherwise because they've been persuaded or cajoled by the product."               

So how does the cost compare to the alternatives?

When it comes to fees, the Loaded card is cheaper to own over a year than a Kiwibank credit card at $18.50 to buy plus $1.50 a month.

Fundzi is more expensive, which it justifies on the basis that it offers financial literacy teaching.

Westpac's prepaid Visa is cheaper again - $20 to buy with no ongoing monthly fees. But it costs $1 a time to load money by ATM or online, making it pricier if it is used weekly or fortnightly to pay pocket money, or by an adult giving themselves a spending allowance.

On the surface, both bank cards cost more than a debit card, which is $10 a year at either bank.

But having a debit card requires a bank account, adding about $5 a month in fees for people who do not already have one.

This is where youth becomes an advantage.

Kids - the people most likely to have no bank account - get free accounts and transactions at Kiwibank, Westpac and elsewhere, making a carefully used debit card cheaper for anyone aged between 15 (the minimum age for a debit card) and 18. Tertiary students get largely free accounts too.

Prepaid cards might be handy for kids' school trips or pocket money, if carefully used.

For adults, it comes down to whether the benefits outweigh the costs of adding another card to the arsenal.

Which brings us back to Tripe's warning about fees.

Withdrawing money over the counter is $3-$6 at the banks.

Loaded stings users $25 for exceeding balances and 25c a text for checking balances (it is cheaper, 5c, for email alerts).

Loaded ATM cash withdrawals and balance enquiries cost $1 each, regardless of whose ATM it is - a good lesson for children to watch out for bank fees.

A crafty user will spend the last dollar, because closing a Loaded card and moving the balance to a bank account costs $15.

A query to the Government about fees for its pre-paid eftpos cards had not been answered at the time of writing. The dull green plastic is part of a youth package slated to cost $20 -$25 million a year initially.

In Australia, beneficiaries have complained that similar government cards are demeaning to pull out at the grocery store, prompting fierce debates about paternalism.

There is no suggestion that they might be made more glamorous with a splash of Kardashian branding.