Prepaid cards -- nice gift, but watch those fees
Ask for a gift certificate from a department store for your friend's
birthday and you'll likely get something that looks like a credit
card instead of the traditional paper certificate.
Visa and MasterCard know a good thing when they see it, and are
taking the idea a step further. They're issuing prepaid, or pre-denominated,
stored-value cards, as they're called, that can be used anywhere
Visa or MasterCard are accepted.
"The gift card is great because you can load it with $40 and
give it to someone for a gift. You have no idea what they want.
This way they aren't forced to buy something somewhere in particular,"
says Paul Smith of Wildcard Systems, a Sunrise, Fla.-based company
that helps businesses develop prepaid card programs.
But the cards are expensive. In a time when banks are increasingly
relying on fees for revenue, gift cards are a bonanza for them.
The fees typically associated with these cards are substantial.
These gift cards offer convenience, but you pay a hefty cost.
Riding the prepaid card bandwagon
Gift cards have been around for quite a few years. Employers use
them as incentives to reward employees, and some companies use them
to woo customers.
But banks have been a little slower to jump on the bandwagon and
make them available to just about everyone.
Bank of America began offering a lineup of gift cards late last
year. They cover all the usual suspects -- birthday, Christmas,
Hanukkah, anniversary, plus there are generic "I love you"
and "Thank you" cards.
Visa spokesman Kenny Thomas says Bank of America is one of about
11 banks nationwide selling gift cards to customers.
"Our mission is to help member banks displace cash and check
transactions. Prepaid cards offer a lot of flexibility to do that,"
says Thomas. "You need to establish credit worthiness with
a credit card and a debit card requires a bank account. We see prepaid
cards taking us to a new area -- the third leg of consumer products."
The general consumer market for prepaid cards is beginning to boom
and has plenty of room to grow, according to Wildcard's Smith.
"We moved from tens of thousands of cards in the year 2000
to hundreds of thousands of cards in 2001 going into 2002."
Most Visa cards are sold through banks, although PrivaCard of Toledo,
Ohio, is making some MasterCard gift cards available at superstores,
grocery stores and mini marts.
The prepaid gift cards fee trap
For consumers, there's a four-letter word that's important to keep
in mind when it comes to prepaid gift cards -- fees.
If you're buying a card, you'll pay a fee that's based on the denomination
of the card.
Bank of America charges $5.95 for card denominations of $25 to
$300. The fee jumps to $7.95 for $301 to $600. First National Bank
of Omaha sells cards with a stored value of up to $750 for $5.95.
Key Bank offers cards up to $100 for a fee of $3.95, and PrivaCard
officials say their cards generally charge $3.95 to $4.95 for denominations
up to $100.
The bottom line for folks buying gift cards is shop around for
the lowest fee you can find. If you pay $5.95 for a $100 card, that's
roughly a 6-percent fee. Paying $3.95 for the same card equates
to a 4-percent fee, still high but a better deal.
If you want to give someone a $25 or $50 card, even a $3.95 fee
is steep. It would be a lot cheaper to just send a check.
The fee trap for the lucky gift card recipient is a lot more treacherous.
More prepaid pitfalls
Visa and MasterCard gift cards are loaded with fees. Actually, Visa
and MasterCard don't set the fees; the individual issuers set them.
If you receive a card, carefully review the list of fees.
Here are some fees to watch for:
- Most gift cards expire within a year or two, although
some may expire in six months. If you don't use all of the stored
value and ask for a check to close the account, many institutions
will charge $15 as a "closure fee."
- Many gift cards allow ATM access. Some charge $1.50
per transaction, but First National Bank of Omaha, for example,
charges $5 per transaction. Use the card at an ATM not owned by
the bank that issues the card and you'll very likely pay an additional
- If your card is lost or stolen you'll be able to
get a new card for the remaining balance, but the "reissue
fees" we've seen range from $4 to $6.
- If you don't spend all the stored value within
six months, most institutions will tack on a monthly "service
fee" of $2.50.
Bottom line -- be happy you received the card but use it up as
fast as you can and don't use an ATM. If you want cash from the
card, buy a cheap item in a supermarket and ask for extra cash back.
There are other uses for prepaid gift cards.
Even though the credit card companies say you don't need to worry
about security when it comes to using their cards for online purchases,
many people are still a bit squeamish about it. A prepaid card in
a denomination just large enough to cover purchases could be an
alternative, says Theodore Iacobuzio of research and advisory firm
"You establish this one relationship and that's all you do,
buy stuff on the Internet. If the card number is ripped off, that's
the only card."
Gift cards also offer anonymity. There's no credit check. Just
plunk down your money. That could be good for folks with less-than-stellar
credit who don't want to apply and tie up a wad of money for a secured
card. Keep in mind, however, you can't build a credit history with
a prepaid card.
Getting people to buy gift cards for themselves is key to making
the market for these products grow.
As that happens, more and more banks will offer them, and it will
become even more critical for buyers and users to monitor fees.
"If you don't want to incur any of these fees, you have six
months to spend the card," says Gus Lejano of Bank of America.