The Problem with the New Amex Debit Card

American Express made quite a splash last week with the announcement of its new reloadable prepaid debit card. The card is being billed as a great alternative for those fed up with their current debit or credit cards.

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In many respects, the hype is well-deserved. The card sets itself apart from the rest of the reloadable prepaid debit market by charging only one fee, $2 for ATM access (the first transaction each month is free). Meanwhile, competitors’ cards tend to come with a laundry list of fees, including those for monthly or annual maintenance, reloading, usage, replacement cards, and even calling customer service. Even the Walmart MoneyCard, which is considered one of the most consumer-friendly options, charges a $3 monthly fee and $2 for ATM access.

However, there seems to be a gaping hole in the Amex card’s terms. While most prepaid debit companies allow free reloading of their cards through direct deposit, American Express doesn’t yet offer this feature. It’s a subtle problem, but an important one, since without direct deposit the card is no longer helpful for most prepaid debit users.

Why is direct deposit so important?

As a general rule, prepaid debit cards are created for and marketed toward the unbanked (or underbanked) population. Something like 7 percent of the US population eschews normal bank accounts, including checking, savings, or credit card accounts, because they don’t believe they have enough money, they don’t trust banks, or they don’t have access to bank branches. These people then rely on “alternative financial services,” such as third-party check cashing, payday lenders, and prepaid debit cards.

With a prepaid debit card, they can get the convenience and flexibility of an ATM card or credit card, without the need for a bank account or a credit line. And with free direct deposit, they can effectively use the card as a checking account replacement.

This is where the American Express option falls a bit short. There are only three ways to load the card—transferring money from an existing checking or savings account, using an Amex credit card, or using a $4.95 MoneyPak from Green Dot to deposit cash (Amex will refund the cost of the first load). So in order to avoid paying hefty reloading fees to Green Dot, the user has to have either a bank account or a credit card. But bank accounts come with free debit cards, and no one with a credit card has any need for prepaid debit.

Because of this subtle hiccup in the card’s terms, the “no-fee” or “low-fee” promises of this new card ring a bit hollow. Anyone who would have use for this card would have to pay $4.95 every time they need to reload it. So if they get two paychecks a month, that’s $9.90 a month in necessary fees, plus any fees they have to pay to get their check cashed. Compare that to the RushCard’s $9.95 monthly fee or Walmart’s $3 fee. (How Laziness Can Cost You Money)

So who exactly is American Express targeting? Amex is a name typically associated with well-heeled, well-banked customers. After all, this is the company that popularized charge cards that have to be paid off every month, as well as premium cards like the Platinum and the Centurion “Black” cards. So a move into the “alternative” market is puzzling.

Even the website for the new card seems to reflect financial freedom, rather than promoting “no credit checks” and “instant approval” like some other sites. But their traditional premium, banked clientele has absolutely no need for a prepaid debit card. For someone with a checking account, a prepaid card would just be another ATM card with more fees. And loading a debit card with a credit card nullifies the purpose of having a debit card in the first place.

Everyone else will have to pay to load the card with cash, and would therefore be better off with any number of other prepaid cards. The only benefit I can see is the “cachet” of carrying an American Express, rather than an off-brand, off-the-shelf card.

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Andrew Carr at American Banker sees this as Amex’s attempt to skirt Durbin Amendment regulations, since prepaid cards are exempt from debit card interchange fee limits. But Amex doesn’t have a debit card business, and credit cards haven’t come under the same rules yet, so this seems unlikely. And

Felix Salmon posted at Seeking Alpha that this aggressive new entrant to the market could be the company’s roundabout way of getting more American Express cards into more hands, forcing more and more merchants to start accepting their cards. Right now, Amex cards are only accepted at about 4.5 million merchants, compared to about 7 million for Discover, and around 8 million for Visa/MasterCard. But this also begs the question—who will benefit from using this card?

Representatives of the company said that they hoped to incorporate direct deposit later this year, but until they do, most consumers will do well to stay away from these cards. While I applaud any effort to bring lower fees and more competition to the prepaid market, it doesn’t seem like Amex quite has it figured out yet.

Tim Chen is founder and CEO of NerdWallet.com, a site dedicated to educating consumers about credit cards.