Cash could be on its way out sooner than we think - at least if the prepaid card industry has anything to do with it.
Prepaid cards are becoming so popular among a rising generation of "underbanked" consumers that the industry is coming up with an excuse to be involved in every aspect of our financial lives, even your kids' allowance.
This season Western Union is offering a card with Advent Financial, a service provider for independent tax preparers, for tax refunds. Millennium Trust, a custodian, offers a card for IRA distributions, and Allowance Manager lets parents load their kids' allowance onto a prepaid card.
With big banks entering the prepaid space, third-party providers are going to have to get creative with their offerings, says Aleia Van Dyke, a payments analyst for Javelin.
"It's a smart way to market a card," she says of these types of specific-use prepaid cards. "They're specifically going after an immediate need someone needs to fill."
The prepaid card market has gained favor recently for several reasons. The number of consumers choosing to forgo traditional banking is rising, more cards tout fewer fees, and big banks are turning to them as a way to make up for lost revenue from recent industry regulations.
More than 20% of U.S. households are underbanked, meaning they do not fully rely on traditional services such as checking and savings accounts, according to a 2011 report by the Federal Deposit Insurance Corp. Instead, they operate almost entirely in cash and rely on alternative financial services such as payday loans or check cashing.
Western Union and Advent Financial have both separately offered prepaid cards during tax season in the past. This year's partnership is an effort to build their customer bases and get consumers to use the cards year-round by linking with Western Union services such as money transfers and faster bill pay, says John Thompson, president of Advent Financial.
The card is available online through Advent Financial or through about 5,000 independent tax-preparer offices that Advent works with.
"The underserved consumer, one of their single largest pay events of the year is the refund they receive from filing their taxes," says Mike Hafer, senior vice president of Western Union, explaining that this customer traditionally receives their refund as a check they then have to pay a fee to cash.
The Western Union/Advent card has a $10 activation fee, though it doesn't apply to cards issued online and can be avoided by signing up for direct deposit or reloading the card with your own funds at least four times totaling at least $2,000.
Last month, Millennium Trust, a custodian that handles IRA rollover accounts, started giving its customers the option of receiving their IRA distribution on a prepaid card.
Most of its clients do not have a banking relationship and are usually opting for a one-time distribution of all their IRA funds, says Terry Dunne, who directs the automatic rollover program for Millennium Trust.
"It's much safer and better protected if it's in a credit or debit card type format," he says. "You don't want to cash $1,200."
Allowance Manager, an online service originally meant for parents to keep track of how much money they owed their kids, ventured into the prepaid space as a way to incorporate real money into the online accounts.
Getting a card requires singing up for the "pro" membership, which costs about $70 a year, or a monthly plan that costs $7 a month plus a $10 activation fee. Parents can set up a recurring payment by linking the Allowance Manager account to their checking account. Money can also be loaded through Greendot MoneyPaks available at convenience stores.
The goal is to introduce kids early on to a world that is increasingly ditching paper for plastic or solely digital transactions, says Allowance Manager co-founder and CEO Dan Meader.
"Young people today will only be paying electronically (in the future)," he says. "Kids really need to have an understanding of this sort of abstract notion of stored value."
To encourage that concept, and because cash is harder to keep track of, the cards can't be used at ATMs, Meader says.
Specific-use prepaid card issuers have to be careful, though, with the features they choose to include, or not, Van Dyke says. As the prepaid market grows, so does the sophistication in the kinds of bank-like features many of them offer, such as mobile apps and bill pay. Prepaid cards that are too tailored toward specific or one-time uses may not fare well, she says.
Still, as Hafer contends, the prepaid industry is young, and the chances for growth seemingly endless.
"The opportunity is still very large," he says. "In any process where cash or checks are involved, a prepaid card can help make that process more efficient."