Banking Up Blog

On December 16, 2010, The Federal Reserve Board proposed a new rule that would lower by as much as 84 percent the $16.2 billion in fees that merchants pay annually when you swipe your debit card at their cash registers. (The Fed asked for public comments on the proposal by February 22, 2011.)The idea is that merchants will save money and pass along savings to you.

Immediately, large U.S. banks and credit card issuers attacked the proposed rules as a threat to their industry, a handout to merchants who get out of paying their fair share of money network costs, and a booby-prize for consumers who gain no assurance of savings but almost surely would face higher banking fees.

See “Debit Card Fee Cap Could Mean Higher Prices for Consumers”

Behind the proposed new rules and the arguments against them are some key questions:

• Why should you care?
• What are the real costs?
• Who should pay?

Read the complete article in the Huffington Post

The day before the “Kardashian Kard” was introduced, I wrote a cautious note on the Huffington Post that said “read the fine print”.  Little did I know that this prepaid card would beat 2 records:

• the product with the highest fees ever
• the prepaid card with the shortest life span: all of 3 weeks

While the shopaholic celebrity sisters did the most damage to themselves, the collateral impact to the prepaid card industry has been pretty widespread, in particular to products intended for teenagers. Since the demise of the “Kard”, many experts and journalists, have published articles extolling the virtues of checking accounts and bashing prepaid cards as generally inappropriate.

In fact, prepaid cards are a better choice than checking accounts for most parents to start transferring financial responsibility to their teens.

The overwhelming majority of checking accounts are intended for a single user. Only a handful of banks, like Wells Fargo, have created dedicated teen checking accounts where the parent and the teen each have their separate online access and privileges to manage the account. Without that kind of dual and hierarchical access, a parent has only two choices: either be the only one to manage the account, or give his or her teen a copy of the username and password needed to access the account. The latter option only works if the parent has no other account with the same bank; a very unlikely situation.

By contrast, prepaid cards built specifically for teens offer parents a supervisory access to load more money, monitor spending, or suspend card privileges when school grades are not good enough.
Also, unlike checking accounts, prepaid cards can’t overdraft.

Prepaid card fees are usually more transparent than checking accounts. Fee schedules are displayed on websites for everyone to see; not so with checking.
And we will likely see a massive increase in checking account fees in 2011, as banks start adjusting to the Frank-Dodd legislation limiting their abilities to charge overdraft protection fees.

Of course, I think that prepaid cards should not be marketed to teenagers by or with celebrities who are not qualified to be financial role models.
Parents can choose instead from a variety of teen-optimized products with low or very low fees like Discover Current, American Express Pass, MasterCard FaceCard, UPside Visa, Visa Buxx, or the PayPal student card.
And keep that username and password for their bank account to themselves.