Do you own a Prepaid card?
‘Plastic’ used to just refer to credit and debit cards, but in the past few years, UK prepaid cards have grown in popularity.
They look just the same as debit and credit cards, but they’re not linked to a bank or credit account; instead money has to be loaded onto them in advance. A bit like a pay-as-you-go mobile phone.
Who uses prepaid cards?
It’s thought that around x number of Brits use prepaid cards. Why? Well, there are many reasons you might want to: to access your cash abroad, to help you budget, or even to receive your wages.
The latter is quite an important point. It’s though that around 2.5 billion adults – just over half of the world’s population – don’t have access to a bank. Granted, a significant proportion of these people live in poorer nations, but it’s also a problem on home turf.
In the UK, 12% of nationals – equivalent to around three-quarters of a million people – don’t have access to a current account. This means overdrafts and the like are out of the question.
However, there are even more people, thought to be around 1.5 million, living in the UK that don’t even have access to a basic bank account. This is largely because their credit rating or financial position doesn’t allow them to.
So, it’s clear that while prepaid cards are used by a wide variety of people, the most vulnerable people in our society are often dependent on them. With this in mind, should the Financial Services Compensation Scheme (FSCS) extend to prepaid cards?
What is the FSCS?
The FSCS is the compensation fund set up by the government that covers businesses and consumers in the event that a provider goes bust. The financial services firm must be authorised by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).
If you’re facing a financial loss because the firm you’re dealing with stops trading, you are covered by the FSCS. It protects deposits, insurance policies, investments and home finance – this includes both credit and debit cards, but not prepaid cards.
“In recent years, prepaid cards have become increasingly common, especially for those people who are unable to get standard bank accounts with debit or credit cards,” said Mark Neale, chief executive of the FSCS.
So, if the provider of your prepaid card goes bust, you could lose all the funds loaded onto the card.
Is it worth the risk?
While the lack of financial protection is a disadvantage, prepaid cards have lots of benefits that can make them worthwhile.
The most important advantage for the under and un-banked is likely that most providers don’t require a credit check, meaning they are much more accessible. Following on from that point, prepaid cards can also act as an alternative to a bank account.
It’s important to have a way to manage your money, even if it’s just to receive wages, benefits payments, set up direct debits and standing orders. If you’re not interested in credit facilities, such as overdrafts, prepaid cards can help you avoid temptation as only the money loaded on the card can be used.
However, if you are looking to improve your credit rating, some cards, known as credit-building prepaid cards can do this. They charge a monthly fee, considered a loan, which then shows on your report as an honoured credit agreement. Of course, you’ll have to pay the fee.
Where there are pros, there are going to be cons. In addition to the lack of FSCS protection, prepaid card users aren’t covered by Section 75 of the Consumer Credit Act either.
Credit card users have the benefit of this cover when spending between £100 and £35,000. It means the credit card provider is equally liable with the retailer to refund money when there’s a problem with the goods or services. Unfortunately, prepaid cards don’t.
This does leave users open to financial loss, but with little other option for the unbanked, it’s a risk they must take. The under banked, however, may be better using a basic bank account for their everyday money management.
Basic bank accounts also have the benefit of fewer fees as there are a number of charges to take into consideration with prepaid cards. These include fees for loading, transactions and cash withdrawals.
As with any financial product, there are pros and cons, but with the risk of financial loss so high for the unbanked, perhaps the FSCS should consider extending their protection to this new payment method.
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|Jemma is a news & research reporter for compareandsave.com.Having worked as a journalist on a number of personal finance websites; she now spends time researching and commenting on UK personal finance stories and investigating new ways to help our readers save money.For press enquiries, please visit our Media Centre page.|