According to a recent report by the FDIC, 5.4% of Americans do not have a savings or checking account. Off Site Link
This makes it difficult for millions of people to access their paychecks or receive financial assistance from government programs, without risking delays or incurring expensive check-cashing fees. Prepaid cards are an efficient way to fill that gap.
As the name suggests, a prepaid card comes with a predetermined amount of money loaded on it. Once activated (usually online or over the phone), the recipient has access to the funds. Similar to a gift card, recipients can use the prepaid card to make purchases, which are then deducted from the balance.
Prepaid cards have become especially important during COVID-19. When the federal government released stimulus funds through the CARES Act Off Site Link, prepaid cards were distributed to people without bank accounts, giving them access to their stimulus money without needing to wait for a mailed check.
Here are a few ways that prepaid cards are helpful to unbanked and underbanked populations.
Prepaid Cards Don’t Require a Bank Account
Paychecks and government funds, such as stimulus money, unemployment benefits, and tax refunds, are often distributed directly into a person’s bank account. But for the unbanked, direct deposit isn’t an option.
While a paper check can technically be distributed to someone without a bank account, this is also not ideal because it would require the recipient to go to a check-cashing agency. Services at some branches may also be limited as a result of the pandemic.
A prepaid card already stores its value, so it can be used as soon as it is distributed in person or in the mail—no bank account or check-cashing service required. Prepaid cards also allow individuals to rely less on cash when making purchases, especially for more costly expenses.
Prepaid Cards Can Be Reloaded and Used For Multiple Purposes
Prepaid cards can be used for either a one-time payment or recurring payments. In fact, many prepaid cards have a routing number and an account number and offer the ability to add more funds as with a checking account.
For example, some government programs will use the same prepaid card for recurring transactions, such as unemployment benefits, housing assistance, and food stipends. Employers can also issue prepaid cards in lieu of paper checks or direct deposit in order to distribute paychecks or pension funds.
Individuals with reloadable prepaid cards may also be able to load their own cash onto the card. A major benefit of reloadable prepaid cards is that there’s no need to worry about collecting multiple cards and keeping track of different balances.
Prepaid Cards Work at Most Retailers and ATMs
Since prepaid cards are branded with Visa® or Mastercard®, they are accepted by most merchants. This can include grocery stores, gas stations, pharmacies, and other brick-and-mortar or online retailers. Because a prepaid card works similarly to a regular debit card, some housing authorities and independent landlords will also accept it as a form of payment.
For even more flexibility, some prepaid cards allow users to withdraw cash from an ATM. Some prepaid cards partner with specific ATM networks to offer no-cost withdrawals. Since cardholders can only spend the balance loaded to the card, users don’t need to worry about overdrafts.
What Does the Future Hold for Prepaid Cards?
As COVID-19 has expedited the transition to a cashless world, prepaid cards will become more important than ever to help the unbanked.
Sunrise Banks offers prepaid cards that enable users to transfer their own funds onto the card, or load direct deposit funds from government programs or employers. Learn more about how Sunrise Banks and our partners work to improve equity and access within the financial system.