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Lowering of prepaid debit card fees make them attractive alternative

Prepaid debit cards have a devilish reputation. They're known as high-fee alternatives to debit or credit cards for consumers who can't get a checking account. But that image is on its way out. American Express is entering the prepaid card market with an option that has fewer fees than the typical prepaid card.

Think of prepaid debit cards as the 21st century's version of cash. Load the card with a certain amount of money and use it anywhere plastic is accepted until you spend your last penny. When the money's used up, you reload the card with more cash.

They look like debit and credit cards, but they aren't linked to a bank account, there's no credit check, and you can't buy now and pay later. Prepaid cards also lack many of the protections regulators require for other plastic in your wallet, although some issuers offer FDIC insurance or coverage from theft.

Americans will put an estimated $70.7 billion on reloadable prepaid cards this year. That's a 153 percent increase from the $28 billion loaded onto such cards in 2009, according to research by Mercator Advisory Group.

It's a product of our times, appealing to consumers who are trying to rebuild the good credit they lost during the recession and those learning to live on less.

"Consumers are making significant use of prepaid cards because they're trying to instill more discipline into their financial lives," explained Ron Shevlin, a retail banking analyst with the Aite Group in Boston.

Mom can stay within the grocery budget by loading $100 a week onto a prepaid card. A hungry college student can switch from credit to prepaid card, avoiding the proverbial late-night pizza that costs $200 -- after interest charges -- by the time the bill is paid.

Prepaid cards also provide an alternative for checking account customers fed up with rising fees. Jennifer Tescher, head of the Center for Financial Services Innovation in Chicago, thinks more and more consumers with good credit will ditch a checking account that, "at $10 a month or $12 a month, is not offering enough value to them."

Regulatory changes are also paving the way for prepaid cards. Banks have had to eliminate some credit card fees and are currently battling against the Federal Reserve's proposal to cap the fee they earn when a customer uses a debit card at the cash register.

So far, prepaid card fees have been left alone. This makes prepaids an attractive market for banks to make up lost fee income. That could translate into higher fees for prepaid users.

The American Express prepaid card lacks the activation fees, transaction fees and monthly maintenance fees common among prepaid cards. Every card comes with one monthly free ATM withdrawal. After that, transactions cost $2 apiece.

Consumers with a bank account can load the card for no charge. However, the only way for the unbanked to load the card is to pay $4.95 for a Green Dot MoneyPak, available at major retailers. American Express is quick to point out that it's not the company charging that fee. But to consumers, a fee is a fee is a fee.

Other prepaid cards allow users to deposit their paychecks for no cost. "Direct deposit is the key to making prepaid affordable The reload fee is really the biggest obstacle for prepaid being a good value," Tescher said. American Express spokeswoman Vanessa Capobianco says the company is looking to add direct deposit later this year.

Tescher suggests that consumers considering a prepaid card look at their current method of getting by financially and compare those costs to various prepaid cards.