Chris Espinoza was having a hard time making purchases or paying bills online because he didn't have a bank account.
"Nobody wanted to give me an account," said Espinoza, now 31. The La Habra, Calif., resident explained that being financially reckless during his youth "messed me up."
"Doing everything with cash was hard," he said.
Espinoza found his banking workaround in the Bluebird prepaid card. Offered by Walmart and American Express, it allows users to function as though they have a bank account, providing services through its mobile app such as direct deposit, online bill pay and check deposits.
According to the Federal Deposit Insurance Corp., more than a quarter of U.S. households either do not have traditional bank accounts or they do but use alternative financial services anyway.
Many people are turning to general-purpose reloadable prepaid cards, which function like debit cards, minus the checking account. The cards can be used to withdraw cash at ATMs and for purchases online and at retail cash registers.
Sold at retailers, banks and online outlets, the cards are branded with a payment network logo, such as American Express or Visa, and can be used wherever that brand is accepted.
In some cases, these cards offer lower and fewer fees than basic checking accounts, according to a recent report by the Pew Charitable Trusts. But consumers can incur incremental fees for buying certain cards, loading them with money or even not using them.
Building better financial habits
Some of the Bluebird card's features exhibit the hallmarks of innovation in the prepaid card market.
• The card allows users to designate funds for savings by funneling them into a linked "SetAside Account" — a kind of buffer against unintentional spending. Christina Tetreault, staff attorney at Consumers Union, said there is some evidence people are using such linked tools for budgeting.
• Another feature is Bluebird checks, a stack of paper checks that cardholders can order for roughly 50 cents per check. Users must preauthorize each check online or with the card's mobile app to avoid an overdraft. Tetreault compared the 50-cent check with a money order, which at the post office costs $1.20, the lowest price available.
• Bluebird also has online bill pay, which allows users to pay individuals and merchants with checks and electronic payments sent through their account or the app.
Mobile phone providers also are offering prepaid cards with payment-management apps. Sprint's Boost Mobile debuted its Mobile Wallet last spring, and T-Mobile unveiled Mobile Money last month.
A critical caveat to prepaid cards is that consumer protections haven't kept pace with all of the innovation, Tetreault said.
"We'd like to see mandatory FDIC insurance for all prepaid card accounts and the same protections against fraud and loss that apply to debit and credit cards," she said. For now those protections are provided voluntarily for prepaid cards, but not by law.
With FDIC insurance, prepaid cards are eligible to receive federal benefits like Social Security payments. Consumers also benefit because their money is safe if the company goes out of business.
Comparison shopping prepaid cards also can be difficult due to a lack of uniform disclosures. And some fee breakdowns are very complex, which is a problem throughout the alternative financial services sector.