Banking Up Blog

Consumers would love to get a better handle on how much financial services cost. Schedules of fees can be maddeningly complicated, and are often difficult to find (or to read when printed in very small type).
I spent a couple of hours today looking for the tables of fees on a dozen of websites selling prepaid card services, and each site had its own way of listing their fees.
Not good.

Senator Charles Schumer of New York was at the initiative of a credit card disclosure law enacted in 1988, when he was a congressman, where all fees are grouped in a “Schumer box“. This has improved transparency quite a lot.
The Center for Financial Services Innovations is now preparing a similar “box” for prepaid cards. The final format of the box has not been published yet, as this is still work in progress.

Below is a sneak preview showing how we are “thinking inside the CFSI’s box” and preparing to follow their recommendations. This fee box is for our mainstream UPside card product.
Expect a few tweaks here and there as the model gets refined and finalized.

Prototype of the Fee Box for the UPside Visa Prepaid Card:

At its most profound, the Internet helps drive global change, toppling dictatorships overseas or, closer to home, assisting people to protest Wall Street’s role in the financial crisis and economic inequality.

On a less grand but just as important scale is the Web’s role changing people’s everyday daily lives.  From researching medication to buying college textbooks, we do most tasks differently on the Internet.

As creators of Web services, we need to think carefully about how our services affect consumers’ overall wellbeing. A business model that provides a decent value proposition for customers and makes money for shareholders is fine. But it’s not enough. A service, even when used a lot, should cause no harm. Even more, a service should help make people’s lives better.

The need to do right is essential in my sector, online financial services, particularly when serving young or financially vulnerable customers. Offline, there’s a raft of businesses created to profit from people on the financial edge – lotteries, payday lenders and shady mortgage providers. When people use these services to an extreme, it hurts them.

Online startups, can do better.  But, how do you make money online and do right, especially with people who are broke? Here are some of the principles we keep in mind:

1. Charge only for value. Only charge for services that people value enough to explicitly choose to pay for. People value a movie enough to pay $2.99 to rent one. They do not value late fees and would not choose to pay them.
2. Align pricing with customers’ economics. Say a typical customer’s disposable income is $3,000 annually or $250 a month after normal expenses. What portion of that is fair and reasonable to pay for the value our service provided? Is the service pricing aligned with customer reality?
3. Drive behaviors in a positive way. Provide a meaningful incentive for a positive behavior rather than a fine for negative behavior.  Offer points, rewards, drawings and prizes. For example, in my industry, electronic payments, debit cards can make it easy to overspend. They also can make it easy to save by automating the process and providing rewards.
4. Transparency isn’t enough. Transparency is the nom du jour. But customers are busy. Most don’t read our fine print, blogs or even emails. If information is important, it’s up to us to get their attention and engage them, preferably right on the splash screen. Use widgets to take subscribers through objective pricing comparisons. Use videos to help explain any service changes that might otherwise confuse people. Techniques like these save on support costs and help increase customer satisfaction.
5. Add extras. Sometimes you can partner to add extra value for customers – and give them added reason to stay with you — without adding cost to your company.  For instance, at iBankup.com, we offer subscribers a card that provides meaningful discounts on medications at all major pharmacies in the U.S. at no cost to customers or our company.
6. Control costs. To keep customer costs down and service levels high, we have to invest where it matters most – in employees and technology — and otherwise run tight ships. Luckily, as engineers, that comes naturally.
7. Build relationships. We need to treat all customers as we do anyone with whom we have personal, long-term relationships. We should feel proud of the way our dad, college roommate or niece would experience our services on a daily basis.

These are just some of the factors to consider when creating Web services for the  90 percent of Americans, whose average income was $31,244 in 2008.  A few weeks ago, the Center for Financial Services Innovation published its version, called the Compass Principles and I’m sure there are others.

How about you? How do you think about building a business that goes beyond “do no evil” to “do right”?

During tough economic times, many of us can get dangerously close to the bottom of our checking accounts several times a year. As checks may not clear in the order we write them, sometimes our balance will even go negative by accident.  This is the dreaded overdraft.

Many years ago, banks invented a curious form of protection against overdrafts: you are permitted to overdraft, so that you don’t get embarrassed by a bounced check or a decline of your debit card in the shop, but you are charged a fee for this tolerance. The overdraft protection fee punishes you for having gone negative on your balance, while you find some money to get back into positive territory.

In all fairness, banks are giving you a temporary credit while your balance is negative and they deserve to be compensated for it. But $38 Billion during a single year? That’s $126 for every single of the 300 Million Americans, including newborns and the millions without a bank account.

According to economic research firm Moebs Services, here are the yearly revenues from overdraft fees collected by US banks since 2005:

In 2010, under congressional and public pressure, banks and credit unions started changing the terms of checking accounts to ask for voluntary opt-in to overdraft protections instead of making it a systematic feature. That year, revenues from overdraft fees fell slightly back to their 2008 level.

In 2011, they are resuming their steady rise.

Not all of us overdraft our accounts. But those who do, tend to do it repeatedly. You don’t want to be part of the club of “frequent overdrafters”; this dubious distinction is costing hundreds of dollars per year.

Unfortunately, the people hurt the most by these fees are the ones who can least afford them.

The Consumer Finance Protection Bureau, which starts operating this summer, will certainly try to protect you against these overdraft protection fees and other abusive clauses hidden in bank disclosure statements that average 111 pages in length according to a report by the Pew Charitable Trust.
This is quite a long shot though. With steadily increasing revenues in the tens of billions, banks will not be tamed easily.

So, what are you to do to protect yourself? Oddly enough, don’t opt for overdraft protection: this is when the fees kick in. You could choose prepaid accounts that cannot overdraft and never charge an overdraft fee. Some of us in the financial industry are adhering to these simple “do no harm” rules, but we obviously need to do a better job of making our products known.

9am sharp: my office phone rings and displays “Cell Phone, Boston, MA”. Not a good sign. When someone calls my direct line from their cell phone as soon as the office is supposed to open, this is a customer being upset with something our company did or did not do, and I need to be prepared to receive an earful.

We operate prepaid card services and a lot of our customers have no other financial instrument available. They are, as the FDIC puts it, “under-banked”. So, even a small hiccup can be a major issue, as most of their everyday money may be sitting in an account we manage.

The man at the other end of the line turns out to be rather courteous, and his issue of a forgotten account password is rapidly resolved. Before hanging up, he has one last question:
- “how much money can I have in this account?”
- “$10,000”, I answer.
- “Good, so I’ll be able to set up my mortgage payments then.”

As he seems to be an atypical customer, I probe him for more details about how he intends to use the card. “See, I am over-banked…” he says. “…I have many accounts at several banks.  In spite of having been with my main bank for so long, they want me to maintain a minimum balance of $5,000 in my checking account and opt for the overdraft protection service, and then agree to pay a fee when transferring money from my savings account, all of this to get “free checking” where they would not charge me a monthly fee. So I like what you guys do and I am switching over.”

Over-banked? This person is making my day, after all. I expect a lot more customers like him fleeing big banks in droves starting this year.

NPR’s marketplace had a segment earlier this month about banks targeting new fees towards lower income customers. The expected outcome: driving these customers away from the banks. Kind of “de-banking” them.

I thought our mission at Plastyc was to help the under-banked. Now we are getting prepared to welcome the over-banked and the de-banked.

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.