Prepaid Cards: Banks and Celebrities Love Them ... But Should You?

It seems there's no shortage of banks issuing prepaid credit cards in 2013, and no shortage of customers -- and celebrities -- willing to give them a chance.

This hybrid of credit and debit cards (you pre-load the refillable card with cash and then use it like you would a credit card) is rapidly grabbing market share from its plastic predecessors. It began in 2011 when a new law limited how much banks could charge merchants for debit card transactions (known as swipe fees). Banks scrambled to find a way to replace the profits they were losing -- a whopping $40 billion a year in revenue.

The solution? Make debit card customers pay higher fees.

Customers rebelled, switching from debit cards to credit cards, switching banks entirely, and searching for alternative ways to pay with plastic.

For a while it seemed that gift cards would fill the void, especially since the Credit CARD Act of 2009 nixed many of the more predatory practices associated with those cards, including inactivity fees, dormancy fees, and service fees. But the limitations of gift cards left the door open for another solution.

Enter the prepaid credit card. And it's not just banks who are itching to push this latest trend in plastic.

Hot New Product? Put My Picture on It!

Celebrities who previously hawked songs, perfumes, and clothing lines are entering the financial services arena with alarming speed.

"Prepaid now serves a meaningful role in the financial services landscape. And so it's not surprising that new celebrity endorsers are jumping into the space," says Rob Rosenblatt, CEO of Russell Simmons' RushCard.

In fact, celebrity-backed prepaid cards go back nearly a decade: In 2003, Hilary Duff's face was on a prepaid Visa aimed at teens. In 2004, R&B star Usher was the celebrity of choice.

Current teen heartthrob Justin Bieber made news recently when he announced his new card, and promised to make videos about the importance of financial literacy.

In a move aimed at adults, financial guru Suze Orman launched her branded card last year with a goal of increasing transparency in the prepaid market in 2011.

But endorsement deals can backfire, particularly when it comes to this product that is not currently subject to many of the regulations governing gift cards and credit/debit cards.
"As fast as celebrity endorsers enter the fray, many of them leave just as quickly," says RushCard's Rosenblatt. He knows too well how such endorsement deals can create negative press: The Russell Simmons RushCard has come under fire for its high fees.

Crazy fees were also the downfall of the Kardashian card, which was on the market for just a few short weeks before it was pulled due to complaints about its exorbitant hidden fees.

Regardless of whose face graces a prepaid card, the real value of the product comes down to fees and benefits. How much will it cost to use this card, to reload it, to withdraw cash, to replace a card, or to maintain monthly fees? What benefits, online apps, and financial tools are available?

If those answers aren't readily available -- and completely transparent -- customers would do well to move on to another option.

Molly McCluskey is a contributor to The Motley Fool. Join her personal finance and travel discussions on Twitter @MollyEMcCluskey.