New prepaid debit cards target niches or aim to replace bank accounts

When Steve Streit conceived the prepaid debit card, he had something very specific in mind: a way to let kids spend money online without using a parent’s credit card.

He didn’t imagine that 16 years later the cards would be used by tens of millions of lower-income Americans to manage their money – or that a bevy of small rivals would offer new products on top of the prepaid system he pioneered.

“It’s much bigger than we thought it would be,” said Streit, the founder and chief executive of Pasadena’s Green Dot Corp., one of the nation’s top prepaid card issuers. “And it’s still very early on.”

The cards are targeting an assortment of niches – as varied as Uber drivers and business owners who want to restrict employees’ corporate spending. Others have broader business models and are trying to use prepaid products to replace bank accounts, especially for millennials who may have no tied to traditional banks.

But unlike Green Dot, which boasts that it invented the prepaid card industry, most new firms are going out of their way to call themselves technology companies, perhaps partly because of the stigma that comes along with the prepaid industry.

The cards have long been decried by consumer advocates who argue they come with too many fees and too few consumer protections.

Last month a new wrinkle arose when technical problems at RushCard left thousands of customers without access to their money for more than a week.

But the market is too big and fast growing to ignore. Mercator Advisory Group, which tracks the industry, estimates that Americans will load $100 billion onto prepaid cards this year, up from about $57 billion in 2011.

And for entrepreneurs there is another attraction: Startups can offer prepaid cards without becoming banks.

The companies need only to build their websites, tools and apps, and focus on marketing. The more complicated and more regulated back-office functions of handling customer deposits and payments are left to banks that specialize in working with prepaid card issuers.

“Prepaid has created a platform that allows you to very quickly test a new product and get it into the hands of consumers,” said Andrew D’Souza, founder of Toronto start-up Clearbanc, which in October launched a product built specifically for Uber drivers and other workers in the gig economy.

For example, drivers can link Clearbanc to their Uber accounts and, for a $2 daily fee, get paid daily instead of weekly. The company hopes to offer the service to customers who work for Uber rival Lyft, delivery service Instacart and others.

It also offers to set aside money for income taxes – freelancers don’t have employers to withhold taxes for them – and has budgeting tools that show how much more they need to work to hit monthly income goals.

“The way other tools are set up, it’s ‘Here’s my monthly income, what’s the best way to allocate it?’” D’Souza said. “With Clearbanc, it’s reversed: ‘Here are my monthly bills, how much do I need to work?’”

Two other firms, both in San Francisco, are targeting their prepaid products to businesses.

Karmic Labs, which was founded in 2013 and launched its product Dash this year, gives business owners a single account connected to several prepaid debit cards that different employees can use to make purchases.

One common feature for nearly all prepaid debit cards is that, unlike with a debit card linked to a bank account, it’s impossible to overdraw. And unlike a corporate credit card, employees can spend only as much as their boss has put on their card.

Bento for Business, which also launched its product this year, has a similar model, with a few twists. A business owner can set daily, weekly or monthly spending limits for each debit card, and can also limit the types of businesses where cards can be used.

Other startups are casting themselves as alternatives to banks, especially for millennials – 45 percent of whom owned prepaid debit cards as of 2013, according to a report cited by the Federal Reserve Bank of Philadelphia.

In an era when most checking account funds are accessed through debit cards, they argue there’s little difference between a prepaid account and a checking account. Some prepaid companies even charge lower fees than banks.

This story was originally published December 22, 2015 at 4:58 PM with the headline "New prepaid debit cards target niches or aim to replace bank accounts."