Trying to Understand the Unbanked's Acceptance of Prepaid Cards

To people with checking accounts, prepaid cards will never make sense.

We're not used to seeing fees displayed so prominently and charged so frequently. We deliberately keep, when we can, the minimum balances that entitle us to waivers on most fees, and if we feel we've been charged improperly, we try to get the fees reversed.

Because we are so used to handling our money this way, fee-laden prepaid cards look like a bad deal. Having such visible fees, even if they're low, is an alien idea. It's like wearing your underwear on the outside. It just isn't done.

And so perhaps it should have come as no surprise that Suze Orman, the Oprah-approved personal-finance guru, came up against some pretty strong backlash for attaching her name to a prepaid card-even if the card's monthly fees are more in line with the low-end card offered by Wal-Mart than the VIP-only (and very short-lived) Kardashian Kard.

Shortly after Orman's card was introduced in January, she was accused of compromising her credibility by endorsing an exploitative product. Orman lashed out at her critics, even calling one an "idiot" on her Twitter feed, for which she has apologized.

The conflict here may not be one of social media impropriety, nor of a respected authority abusing her influence, but of a psychological and experiential disconnect between those who have traditional, full-service bank accounts and those who don't. Hard-core bank customers may never understand how, to the unbanked and the underbanked, prepaid cards can look great-even honest.

No story illustrates this better than a 2009 National Public Radio piece about a man named Al Walker who used an expensive check-cashing store even though he had a bank account. The reporter showed Walker, fee by fee, how he would save $5 per check just by depositing his checks in the bank account he already had-but Walker refused to use the bank.

"I don't have to worry about an overdraft fee here" at the check-cashing store, he told NPR. "I don't have to worry about overdraft protection. I don't have to worry about whether this is free. I know what I'm paying; it's the same every time I come here-and maybe that's something banks should look into."

Fees on Orman's card are low but numerous. The Approved card, as the product is known, carries a $3 purchase fee, a $3 monthly fee and loading fees for those without direct deposit. There are fees for paper statements, for calling a live agent more than once a month, for withdrawing cash from ATMs outside Cardtronics' Allpoint network, and so on.

But the audience for Orman's card, or any prepaid card, doesn't necessarily mind if it's more expensive than a bank account. These cards earn users' trust by being open about their fees instead of surprising people with overdraft charges.

Perhaps this is why someone like Russell Simmons, the music mogul behind the RushCard, can get on his Twitter account to voice his support for the Occupy Wall Street movement and, on the same day, remind that audience that he charges them each $120 a year to own his card.

To his audience, that's not predatory. That's honesty. And as Walker said, maybe that's something banks should look into.