Banking UP

Where is my son’s free pizza? Or tee-shirt?

See, during the first weeks of college, banks with folding tables and chairs scattered around campuses used to feed (or dress) my kids for free. All the students had to do was apply for a credit card.

Alright, so the practice of merchandise giveaways to entice college kids to apply for credit cards at public universities in California was banned two years ago by Gov. Arnold Schwarzenegger.

This ban is now being extended nationwide by the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009: no freebies in exchange for credit card sign ups on or near campuses anymore. While the term “near” remains undefined, the new law goes well beyond the college campus: it forbids the marketing and issuance of credit cards to people under the age of 21 unless they have adult co-signers or show proof that they have the means to pay off the debt.

The good news is: with far less credit cards around college campuses, the debt burden on Generation Y is going to lighten up significantly over the next few years.

Is there a flip side to this coin? Will the macro-economic benefits of a less indebted youth be obtained at the detriment of the students’ financial freedom? What are college students and their parents supposed to do?

Here are some options:

• Deposit, say $1,000, as the security for a secure credit card. This would give the young cardholder a line of credit somewhere between $500 and $1,000. Regular payments are expected to be made, like with a regular credit card, but should the student default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The deposit would act as the “means to pay off the debt”, as stipulated by the law, although it is not yet proven that security deposits would be considered as such.The advantage of the secured card for a student with no credit history is that most issuers report regularly to the major credit bureaus. This allows for starting to build of positive credit history.The major drawback is that fees and service charges for secured credit cards exceed the already skyrocketing fees charged for ordinary non-secured credit cards.  If you think that banks will happily open new lines of credits to young users, think again: in the past 12 months, banks have reduced credit lines by $1 Trillion.Also, it is customary that the deposit is not used by the issuer when one or two payments are missed, but is used at the time of closure of a delinquent card, when the balance exceeds the credit limit, leaving the student cardholder with a debt AND losing the deposit.
• Get a credit card with the parent as a co-signer. Although this sounds quite straightforward, this is also quite dangerous: any mis-handling by the student can severely damage the parent’s hard-earned and long-standing credit record.It also is a double-edge sword with respect to transferring financial responsibility to the young user: while a longer parent-child interaction is probably good for building up financial savvy, it can have the opposite effect of reducing the young users’ motivation to become accountable and autonomous.
• Stay away from credit cards altogether and stick to a checking account with a debit card. Here, there is no risk to the parent, but the dreaded overdraft fees and other minimal balance and account maintenance fees are lurking.
• Get a prepaid card account, which is similar to a checking account coupled to a debit card, but without the overdraft fees. Of course, some prepaid cards are loaded with other fees, as discussed in an earlier post, but you can shop around easily for the lowest cost choices.  Some prepaid card accounts like iBankUP.com include the ability to create on-demand paper checks from an online interface, this offering the equivalent of a checking account.Some prepaid cards are specifically intended for students that receive financial support from their parents. They feature a dual online access, one for the student and one for the parent, including the ability for the parent to program an automatic allowance.Yet other prepaid cards offer a bill pay service with the option of reporting payments to second-tier credit bureaus; this allows the cardholder to start building a positive credit history.

Here is a summary of the pros and cons of each option:

From the Huffington Post, Monday Nov 23, 2009.

Forget bailouts. Forget regulations. Forget stimulus packages and executive pay caps. If we want to see real recovery, we need to see real innovation.

Yet the traditional financiers of innovation, venture capitalists (VCs) are fiddling while Rome is burning. A recent survey of US venture capital activity shows that the three sectors with the least investment in the second quarter of 2009 are:

• healthcare
• retailing/distribution
• financial services

Quick, what are three sectors of the economy that the U.S. depends on for a sustainable recovery? You got it.

Read the full article here :  Patrice Peyret: Unhappy With Your Bank? Blame Silicon Valley.

Modern cars have a reliable fuel gauge. Actually, they have a conservative fuel gauge: when the empty light goes on, you still have ample miles to go, so that you can find a gas station before it is too late.

Money Gauge

Not so with your bank account: even if you have online – or cell phone- access to your account, you just don’t know how much money is really left. Recent credit card transactions may not have settled yet. Checks you wrote may not have been cashed. So, your balance is usually optimistic and you don’t have as much money available as you are being told.

Your bank likes it that way: it will earn more interest on your unpaid card balance and collect fees on your unexpected overdrafts.

Collectively, banks are expecting to rack up $27B in checking account overdraft fees for the year 2009 alone.

Could your money have an accurate gauge?

If you go for an online account based on a prepaid card, like iBankUP, your balance will be accurate, thanks to the prepaid nature of the service.

As purchases are made, the balance is automatically adjusted downwards.

If you write a check against the balance of the card account, the amount of the check is also reflected right away, instead of waiting for the check to be cashed by the recipient.

You get a “no-surprise balance”. Whenever the balance is slightly off, it actually displays a lower amount than really available, either because an authorization hold from a restaurant (or, ironically, a self-serve pump at a gas station) has not been removed yet, or because a check expires or remains un-cashed.

Hypocritical greed…

At least, Gordon Gecko, the character played by Michael Douglas in the 1987 movie “Wall Street”, was admitting it openly: “greed is good”.

Many providers of financial services for the underserved and disadvantaged seem to be sharing this motto, but they are very covert about it. Of course, they would like to be seen as acting for the greater good of their non-privileged customers, but the price of their products screams otherwise.

Take those prepaid cards supposed to help new residents or un-banked people achieve the American dream: they are precisely those with the highest purchase prices and with the outrageously named “convenience” fees levied at every transaction.

This is Robin Hood in reverse: wealth is being transferred from the less fortunate to the rich -and sometimes famous-, all under the pretense of doing some good.

…combined with shameless exploitation…

Unscrupulous service providers are taking advantage of the simple fact that under-served people are also often “under-complaining”: there is almost no risk of being sued or publicly lashed by consumers with limited access to the media, who can’t afford lawyers, or are simply afraid or ashamed of being publicly identified as victims.

The result? Fees and charges imposed on those who can least afford them.

OK, so maybe the shameless exploitation of under-served, under-complaining customers doesn’t necessarily have its roots only in hypocrisy and greed. In fact, another big culprit is complacency.

… all fueled by pervasive complacency

As I have argued in an earlier post, banks and financial services providers tend to preserve the status quo of an inefficient industry with too many intermediaries and too many Vice Presidents.

Very few market players have the discipline and willingness to structure themselves leanly and resourcefully. Newer entrants are often – but not always- at an advantage because they don’t have to shed a legacy of prior business and process structures.

So, who’s wearing which hat?

The great thing about financial products like consumer prepaid cards is that fees must be posted visibly on websites; this is mandated by the payment networks and by regulations. So anyone can go and see for themselves how much various products will cost them.

Below is a ranking chart based on published fees as of November 12, 2009. The “tips of the hats” are admittedly un-scientific, but the dollar numbers are.

And here below are the same numbers, as  a percentage of the money circulated in the cards, assuming a monthly circulation of $320 on average.

How Many Bank VPs?

The financial services industry is not known for its innovative spirit – see previous post on this subject-. I am not failing to notice the amazing intellectual Rubik’s cubes that were invented in the field of speculative trading and led to the financial crash of last year. I am lamenting the lack of new, cheaper and more efficient services for every day’s management of money by average consumers.

Even more regrettable than the lack of better products and services, is an ossified industry structure with numerous “middle-men” and top-heavy hierarchies dominated by highly paid executives.

Admittedly, it must have been reassuring for bank customers in the 18^th, 19^th and 20^th centuries, to see that the President of their bank was well nourished, could afford to smoke huge cigars, and was surrounded by many Vice-Presidents of the same allure.

But today? How many Vice-Presidents does it take to manage your bank account?

Your money at work

You have probably noticed how ingenious bankers seem to be when it comes to preserving established minimum amounts of fees and charges. They defend fiercely a zero-sum game: if regulators force them to reduce certain fees, then they immediately find some other way of charging customers somewhere else to compensate for the lost revenue stream.

See, when a lot of Vice Presidents are expecting to live off of your money, it (meaning your money) had better yield enough, by whichever way possible.

I am actually unfair to banks: the financial services industry as a whole is unwilling to challenge its own lack of efficiency. It just has too many intermediaries with a vested interest to maintain a status quo.

Take payment services. Unless you are a member of that industry, you are probably not aware of the presence of issuers, acquirers, PSPs (payments services providers), gateway access providers, processors, networks, program managers, program sponsors, ISOs (Independent Sales Organizations) super-ISOs, agents, without mentioning a vast array of technology providers.

Chances are that even your simplest payment transactions touch five or six of these organizations. And pretty much all of them have numerous Vice Presidents of their own…

Do-It-Yourself scrutiny

Financial services seem to be impervious to the type of efficiency improvements and elimination of middle-men that most other industries have to implement to survive.

Rescue packages fueled by public money are of course not helping change the mindset.

Nevertheless, here is how consumers can help force the industry to improve its own efficiency: ask the hard questions and shop for lower prices.

Granted, no one at your bank branch or behind the 1-800 customer support number will answer your nosy questions about how many Vice Presidents at which level of salary your money is supporting, and how many suppliers –and suppliers of suppliers- are being used to deliver services to you.

How about starting with some basic Internet searching to find out:

• Where are the financial service company’s headquarters? (About Us section)
• Is it owned by some other group or has it gone through a cascade of acquisitions in its history? (About Us section again, or simply searching for articles with keywords like “acquire”, “merge”, “sold”). Chances are that a convoluted corporate history has stacked up more management layers than really needed.
• How much are executives being paid? (Investors relations – Proxy statements, if the company is public)
• Has it announced partnerships with third parties for this of that service? (News or Press section, or search for keywords like “processing”, “management services”, “back-end services”,“issuance”,  etc)

Then jump to the websites of the third parties mentioned in any partnership announcements and repeat the above.

The same applies to scrutinizing prices. Although financial services are notorious for difficult-to-read “terms and conditions” printed is the smallest character size that they can get away with, they have more obligations than most other industries to be transparent about prices and display them on their Internet sites.

Be prepared to navigate through numerous web pages before discovering the prices you are looking for, but you will almost always find what you need to know.