With prepaid debit cards, you’ll never overdraw your account or spend more than your boss allows. Millions of low-income Americans manage their finances with them, and financial startups are exploring an array of innovative niche markets.
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 from Uber drivers to 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 ties to traditional banks.
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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.
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 in 2015, 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 startup 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 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 last year, gives business owners a single account connected to several prepaid debit cards that different employees can use to make purchases.
An employee might get a monthly allowance — for paying for lunch with clients, for example — or one-time balance transfers to cover particular expenses, such as travel for a conference.
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.
“It’s a safety box of funds that’s separate from your other accounts,” said Karmic CEO Ryan Weidenmiller. “Employees won’t have access to all the money in your main bank account. Prepaid is perfect for that.”
Bento for Business 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.
That might restrict a delivery driver to making purchases at gas stations, said Bento CEO Farhan Amhad.
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.
Simple, in Portland, started out with a prepaid card meant to replace checking accounts. It charges no fees, and it offers customers savings, budgeting and money-tracking tools online and through a mobile app.
In contrast, Wells Fargo charges a $10 monthly service fee for basic checking accounts unless customers make at least 10 debit-card purchases, maintain large balances or have at least $500 in direct deposits going into each account every month.
Consumer advocates remain wary of the industry.
Christina Tetreault, a staff attorney with Consumers Union, notes that prepaid cards often lack the deposit insurance and fraud protection that are standard for bank accounts.
“It shouldn’t be up to the consumer to hunt through the fine print to find out if their funds are protected by deposit insurance,” Tetreault said.
The startups may have even more fundamental business challenges.
Arjan Schütte, founder and managing partner of Core Innovation Capital, a Hollywood venture-capital firm in Los Angeles that invests in financial-technology firms, said most have had only limited success in tapping into the markets they hope to serve.
“Having looked at enough of these, I’m much more bearish,” he said. “Most startups aren’t doing it at any material scale. The ones I’ve seen are all tiny and not getting a ton of traction.”
In part, he thinks, that’s because the financial needs of different customers are not so unique that they warrant specific products.
Put another way, Clearbanc might offer nifty tools for Uber drivers, but those same drivers can probably find some other way to manage their money.