Continue to add incentives.
Criticism of the industry has become so rampant it's easy to forget some important factors contributing to the sector's growth.
First, the Credit Card Accountability, Responsibility and Disclosure Act, which prohibits companies from issuing credit to anyone under 21 unless the applicant has a stable source of income or a willing co-signer, caused parents to look for alternative plastic payment methods that could help college-bound kids in a jam.
Secondly, the Durbin Amendment to 2010's financial reform legislation excluded prepaid cards from the swipe fee caps that cut into the revenue banks make on traditional debit cards. The Durbin exemption is perhaps more notable here as it gives banks and major issuers the incentive to introduce low-fee prepaid products and fosters competition.
To stand out, many prepaid providers have already added incentives to their existing products. Russell Simmons' RushCard gives cardholders the opportunity to earn $2 back for each month they maintain a balance of $500 or more in linked savings accounts and Mango Financial lets cardholders with direct deposit earn 6% Annual Percentage Yield on the money in their saving accounts.Both companies have said they are considering adding other enhancements to their cards. (RushCard is considering alternatives to payday loans and 5% cash back incentives, while Mango says a rewards program is in the works.) While these features aren't likely to completely eliminate the criticism, they could certainly temper it and lead to innovations even harder to discount. Widen their target market ...
In many respects, the controversy surrounding prepaid cards isn't driven by what the cards do or don't do -- it's who the cards are being marketed to, namely low-income people who can't get a credit card or even a bank account in many cases. Asking folks to pay a fee so they can spend their own money is incendiary on its own -- as evident by the revolt banks endured when they announced plans to impose fees on traditional bank accounts last year -- so it's only natural that asking people who are struggling financially to pay a similar fee (and then some) will kick the backlash up a notch. But if providers were to add incentives, as suggested, and actively market these to moderate income consumers as well, they could come out ahead. After all, debit card rewards programs were killed off by the Durbin Amendment and 5% interest on a savings account is few and far between. ... or bill it as a short-term solution.
If a prepaid provider isn't interested in widening their target market, then it might be best to acknowledge the card's limitations. Prepaid offerings don't help consumers build credit and, as such, aren't a viable solution for someone whose main aim is to get on the grid. Admittedly, many prepaid providers are trying to get credit bureaus to accept their data and factor it into credit reports, but until this happens -- and it's an uphill battle -- it needs to be clear the card isn't a solution to long-term credit problems. Not all prepaid cards are created equal. Find out which products rank among the most attractive on the market in our roundup of the best prepaid debit cards. >To submit a news tip, email: firstname.lastname@example.org. Follow TheStreet on Twitter and become a fan on Facebook.