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Will It Replace Cash?
The Prepaid Debit Card Comes To Life
Some far-sighted bank experts have predicted that by the year 2000 (just about five years from now!) we will be carrying a prepaid debit card in our pocket instead of cash. We'll use a plastic card that has a tiny microprocessor chip to take a ride on a bus or subway, do our laundry at the laundromat, buy our McLean burger at McDonald's, make our telephone calls from a public phone, buy our groceries and gas, get a Coke from a vending machine, and even buy a single postage stamp. Purchases for less than $1.00, or for as high as $100.00 or more will be made with the card. Liam Carmody, a consultant on electronic funds transfers, estimates that by the year 2000, 50% of cash being spent at small value, low-ticket retail locations will take place by using electronic transactions.
How Does It Work?
A bank issues a plastic card embedded with a microprocessor chip that customers "load" by transferring funds from their checking accounts, or from their regular credit card, or by paying cash. The bank will put the card in their machine and code the card with the amount the customer pays for.
The funds go into a special account at the bank, and each time the card is used, the cost of goods purchased is subtracted from that account. At the same time, the card's built-in chip subtracts each transaction from the total it holds. When all the credit on the chip is used up, the customer can bring it back to the bank and "reload" it and use it again.
Two Cards In One
Our ATM cards that we use as a debit card in retail stores can also be used as a prepaid debit card, so it will not mean carrying an additional card. This is unlike some other systems already in use-for instance, a debit card issued by a phone company can only be used to make phone calls.
What's In It For Us?
Although some financial institutions are already experimenting with the use of the prepaid card (Chemical, Citibank, Mellon, PNC, Wilmington Trust and Delaware Trust), others are still trying to figure out if there is enough profit in the cards to make it worthwhile. Most likely an annual or monthly card fees or loading fees will be charged. Perhaps a $1 fee each time the card is loaded, or an increase in the annual fee for the debit card.
One of the benefits hoped for is a decrease in the amount of cash that has to be handled from the merchants- counting, recounting, moving, transferring, etc. Some of the boosters of prepaid cards claim that 60% to 70% of the cost of operating a branch is handling cash. They see the issuance of prepaid cards cutting a huge amount of the cost of operating branch offices.
What If It Isn't Used Up?
One of the interesting problems that could arise is the funds that might be left in the bank's account from customers who have transferred money to the card, but then never used the card because they lost it, or forgot it, or whatever. If it accumulates to a hefty amount, it's quite possible that a law could be passed (here comes Congress again!) requiring banks to try to return unused funds to the original owners. The burden that comes off the teller who doesn't have to count as much cash may then be transferred to folks in operations and compliance!
Copyright © 1994 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 5, No. 4, 12/94
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