Prepaid debit cards have been getting a bad rap lately, despite the fact that they are swiftly becoming the go-to product for financially underserved Americans.

General-use prepaid cards had nearly $125 billion loaded in 2009, an increase of 61% over 2008, according to Mercator Advisory Group's recent Open-Loop Benchmark Report. More consumers are choosing prepaid over checking accounts, given economic conditions and negative feelings toward banks. A recent Mercator survey of prepaid card purchasers showed that 15% had bought the card as a way to pay without a checking account or debit card at a bank.

Government use of prepaid is another significant driver of market growth. Social Security dollars loaded grew by 197%, and the dollars loaded onto cards for state unemployment plans grew by 292%.

These numbers will only continue to climb with recent announcements by the Treasury Department to make all federal benefit payments electronic by 2013 and to pilot the marketing and use of prepaid debit cards for tax refunds to unbanked filers.

Prepaid cards clearly are here to stay. So it is even more important that we ensure the cards offer a positive consumer experience.

Some of the criticism of prepaid cards has been over the lack of consumer protections comparable to debit cards tied to traditional checking accounts. In particular, there is concern that general-purpose prepaid cards aren't subject to Regulation E.

Most of the major prepaid providers are largely adhering to Regulation E, but as prepaid becomes a true alternative to checking accounts, good-faith efforts are no longer good enough. While prepaid will become the purview of the Consumer Financial Protection Bureau, the Federal Reserve should act now under current authority to put prepaid on an even footing with similar payment products.

The louder and more frequent criticism of the cards has been focused on fees. While it is important to consider whether the types and levels of fees being assessed are fair, reviewing fee schedules in the absence of data about how consumers use the cards paints a one-dimensional picture of the customer experience.

Prepaid cards, like any financial tool, are not one-size-fits-all instruments. How much consumers pay for them is driven in large part by how they use them. It would be helpful for companies to provide more public information about usage patterns to enable a robust assessment of prepaid. Recent public filings by the prepaid giant NetSpend related to its planned IPO are a good example of the value of such data.

NetSpend's filings show that direct deposit use is the big driver of usage patterns. Cardholders who use direct deposit to load funds are more active users overall and tend to remain active for longer. They initiate an average of 18 debit transactions or cash withdrawals per month versus four such transactions by cash loaders. They load three times more money on their cards, and they use them for three times longer.

Using direct deposit can reduce fees significantly, as consumers can avoid the typical $3 to $5 cost of loading cash by using the free direct deposit service offered by nearly all prepaid card providers. In addition, direct deposit usage improves the economics of prepaid for providers, which in turn increases competition and puts downward pressure on prices.

Many prepaid providers are focused on driving direct deposit usage, and that means getting creative about communicating with their customers.

Card penetration is still relatively low overall, and consumers are still learning how to use prepaid cards most effectively. Card providers have the opportunity and the responsibility to help users make smart choices.

In partnership with my organization, the prepaid provider Ready Credit Corp. conducted an experiment in early 2010 aimed at helping customers reduce their ATM fees by providing them with feedback on their behavior and information on how to change it.

Ready Credit identified a small group of customers that had accumulated $25 or more in ATM fees for at least two months in 2009. Some of these customers received e-mails encouraging them to check their balance online for free instead of performing balance inquiries at ATMs, an activity that results in a 95-cent fee. Others received e-mails advising them to ask for cash back during retail transactions instead of incurring the $1.95 fee that comes with withdrawing cash from ATMs.

On average, customers who opened at least one of the e-mails made 6.7 fewer ATM transactions and reduced fees by $11 a month. The results suggest that targeted messaging can have a meaningful impact on consumer behavior.

A meaningful analysis of prepaid card costs must also compare them to the alternatives. My organization did a study last year, entitled One Size Does Not Fit All: A Comparison of Monthly Financial Services Spending, and found that prepaid card fees, although slightly higher, compared favorably to typical bank account costs.

Since then, prepaid card prices have continued to decline, while banks across the country are dismantling "free checking" in the wake of new overdraft rules and raising checking account prices. Ultimately, consumers will vote with their feet.

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