The latest must-have travel accessory is a prepaid card you can use to pay for things when outside the country without foreign currency conversion fees.
Prepaid cards are a small but fast-growing player in our retail payments system, competing with debit cards, credit cards, e-transfers and cash. If you want access to the most innovative new banking products, you’ll need to get comfortable with prepaid.
Take the EQ Bank and Wealthsimple Cash cards, for example. Use them for purchases outside Canada and you avoid the usual 2.5 per cent foreign currency conversion fee that all but a few credit cards layer on top of the usual cost of converting foreign currency to Canadian dollars. The same applies to a pair of subscription-based accounts offered by the fintech company Koho.
Prepaid cards can be a tiny step backward in convenience from debit and credit in that you may have to load money onto them online or using a mobile app. The benefit of this arrangement is a higher level of control over your money.
You can overspend your way to credit card debt carrying an interest rate around 20 per cent, while debt cards allow you to drain down your chequing account to a point where you’re in overdraft. Using prepaid is almost like putting yourself on an allowance.
There is some historical baggage with prepaid. A class-action lawsuit in Ontario over fees and seized unused prepaid gift card balances resulted in a $17-million settlement in 2021. The new generation of prepaid cards are mainly found in the world of alternative banking, where transparency and zero fees are used as incentives to draw people away from the Big Six banks.
According to the Canadian Prepaid Providers Organization, prepaid is the second fastest payment method after e-transfer. The total amount loaded on these cards is expected to grow this year by 20 per cent to just more than $10-billion. The average amount loaded is estimated at $176.
Loading a prepaid account with money can easily be done via electronic transfer from another bank, an e-transfer or, as with EQ, simply moving money in real time from your linked savings account to your card using the EQ app or website.
Prepaid cards are generally connected to the Mastercard or Visa networks, so they’re useable both at ATMs and establishments worldwide that accept credit cards. Just tap or insert your prepaid card, just as you would with a debit or credit card. Some cards can also be accessed on your phone through Google Wallet or Apple Pay.
You’re also covered by the same zero-liability fraud protections offered by credit cards. Prepaid card issuers are either banks themselves or partnered with banks, which means deposit card balances and/or linked savings accounts can be eligible for deposit insurance.
Issuers of prepaid cards know they have to deliver more value than banks to attract customers and they’re trying to do just that. Spending on these cards can generate cashback of 0.5 to 2 per cent, and cash balances in an associated savings account or on the card earn interest ranging from 0.5 to 4 per cent. Wealthsimple will soon announce a rate structure where all Cash clients get 4 per cent, while clients with $100,000 invested or saved with the company can earn 4.5 per cent and a minimum $500,000 gets you 5 per cent.
Prepaid cards won’t help you build your credit score because you’re spending your own money and not borrowing. Herein lies an advantage if you have a credit card you like for everyday use but prefer to avoid the forex fees it charges when you’re travelling.
You could always apply for one of the small number of credit cards that eliminate forex fees as a perk for cardholders but adding that new card might negatively affect your credit score. With the right prepaid card, you get zero forex and no impact on your score.
I took the EQ Bank Card with me on a recent trip to Chicago. I loaded $150 onto the card at the airport before departure, then used it to pay for coffees and several other purchases. The charges were converted to Canadian dollars at the usual Mastercard rate, but without the 2.5 per cent fee most credit and debit cards charge. A week after returning, 68 cents in cashback turned up in the account.
My main credit card earns rewards as high as 5 per cent on some purchases, so it goes along with me when I travel. But the EQ card rides shotgun, as will the Wealthsimple Cash card I just ordered. Cards like these are a must-have travel accessory.
One final note when paying for goods and services while outside Canada: Never choose an option to pay in Canadian dollars. As explained by Preet Banerjee in a recent column, it will cost you more.
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