This has been a year when financial woes have dominated the macro-economic news at the level of entire countries and even continents. Of course, individual consumers have suffered greatly, with the number of people in financial distress hitting records unseen in several decades.
In this dire context, protecting people’s money should be everyone’s priority in the financial services industry. Regrettably, many large banks and financial institutions have been featured on the front pages of newspapers because they have continued to protect their own money at the detriment of their customers. No wonder 2011 has seen a flurry of regulations intended to stem financial misdeeds: the implementation of the Dodd-Frank Act, the Durbin amendment, the birth of the Consumer Financial Protection Bureau.

At Plastyc, we were unaffected by this regulatory turmoil. Instead, the main additions to our service in 2011 were:

1. Allowing customers to reach a “Premium” level, similar to the frequent flyer status of certain airlines, where maintenance and support fees are waived, and where more cash back points are earned;
2. Issuing a free discount card for prescription drugs valid at tens of thousands of pharmacies to all our account holders;
3. Introducing a Rainy Day Reserve allowing people to save money automatically for emergencies or future purchases without having to open a separate savings account.

Here you have it: three different ways to save money. To be candid, our motivation and self-interest are to keep our customers longer. All three money-saving features foster a longer-term customer relationship, in a year when, for the first time, public campaigns were orchestrated to invite consumers to ditch their banks.

• read the fine print
• select a card with low or no monthly fee
• get direct deposit on the card to avoid trips to the check casher

Pretty Popular Prepaid Payment Cards: MyFoxHOUSTON.com

“Patents suck”, said Google chairman Eric Schmidt at the Dreamforce conference on September 1. In fact, Google purchased Motorola mobility in large part for its trove of mobile phone related patents, as a “weapon of mass defense”, because patents have become a tool to obtain financial compensation from competitors largely unrelated to the original intent of providing inventors a period of exclusivity on their inventions.

In July, the radio show This American Life, had a great piece called “When Patents Attack!” about “patent trolls” in the Eastern District of Texas who have no other purpose in life than extracting protection money from companies with real businesses and products. Instead of threatening to set the business on fire, mafia-style, they sue regardless of the merits of the patents they have purchased (of course they have not invented anything themselves), and offer to settle out of court for large amounts of money. Patents have become the equivalent of cans of fuels and boxes of matches.

The financial industry has not been spared by patent trolls. Visa, Wells Fargo, MasterCard, Bank of America, Citibank, and many others have been sued for alleged infringement of patents related to digital currency systems that were never implemented by the owner of the patents and would make any software engineer roll on the floor laughing at their triviality.

In an intriguing twist, the America Invents Act is requesting that the Director of the US Patents and Trademarks Office put a transitional post-grant process in place for reviewing  the validity of covered business-method patents. The definition of “covered business-method patents” is explicitly narrowed down to:

A patent that claims a method or corresponding apparatus for performing data processing operations utilized in the practice, administration, or management of a financial product or service, except that the term shall not include patents for technological inventions.

Being no lawyer myself, I interpret the  goal of this post-grant review process as being a way to facilitate the debunking of dubious patents, or the defense against patent trolls. It is rather interesting that lawmakers have chosen financial products and services as the target for this transitional process. I guess that they placed a high priority on limiting the use of patents as a weapon against innovators trying to oil the wheel of a stalled economy.

I have been arguing that fees are usually fairly explicit and can be found on websites or on paper agreements sent by mail to account holders. Evidently, the current action by the State of Florida against a number of prepaid card providers shows that there is still some improvement to be made in the quality of disclosures. Nevertheless, the most important factor in the impact of fees tends to be forgotten: how will people actually use the product?

That’s why we have introduced recently an interactive fee calculator on the iBankUP website. The calculator allows people to specify how they intend to use our payment  service.

We ask 7 questions to our visitors:

1- how much $$ will you direct-deposit to the card every month?

2- how many cash deposits will you make per year (using a Green Dot MoneyPak)?

3- How many cash withdrawals will you make from ATMs every month?,

4- How many bills will you pay (i.e. by writing checks) per month?

5- How many PIN-based purchase transactions are you likely to do every month?

6- Are you accident-prone? How many times per year will you attempt to spend more than you have?

7- How often do you think you will need to call customer support and speak with an agent?

Once a visitor to the site has answered the seven questions, a simple press on the “Calculate” button will produce the total sum of fees that the user would incur during an entire year. Of course, we also show how much fees some of our competitors would have charged based on the same behavior.

You can try the calculator by clicking here.

We also explain the math behind the calculator in an accompanying document.

We sure hope that others in the industry will  do the same and publish their own calculators for all to see.

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.

Just a week before, a report from Bretton Woods Inc. entitled “Comparative Analysis of Reloadable Prepaid Cards to Basic Checking Accounts and Check-Cashing” concluded exactly the opposite.

What the heck? As a consumer ready to do your homework, which of the two are you supposed to believe?

Both reports fail to look at your particular circumstances and needs, which have a large influence on what is the best service for you.

Here are a few examples

• Scenario 1: You live in a rural community and can become a member of a local Credit Union which operates just one or maybe a handful of branches. Chances are that you will be eligible for a free checking account and will receive good customer service. The not-for-profit charter of the Credit Union and its economic motivations are favorable to you.
• Scenario 2: You live in a large city, bathed with WiFi hotspots, you spend a lot of time in front of your computer and with your cell phone, and you always have a minimum of a few thousand dollars in your account.  You are likely to handle most of your banking needs online and can get a pretty good deal with a bank after having carefully chosen one you are comfortable with.
• Scenario 3: You are in neither of the above cases and you have decided to stay with a bank that distributes hundreds of millions of dollars of bonuses to its executives every year.  According to recent reports focused on the cost rather than the price of banking services, offering you a checking account costs the bank about $300 per year. This includes the cost of ATMs, branch clerks, and customer support. I can’t comment on the $300 number because I don’t know enough; let’s just say that it is only slightly higher than the real cost because banks have no reason to minimize it.

In summary, prices will range from a few dollars per month to a few tens of dollars per month. This is a factor of 10x.

So, analysts who need to pick examples among thousands of banks and hundreds of prepaid card account programs, will come up with any numbers within that large range, even if they have no particular axe to grind.

Besides ignoring the economic circumstances and motivations, these reports also forget to measure the value to you.
You could argue that rectangular pieces of paper (checks) and rectangular pieces of plastic (cards) are all the same, because they are so well standardized (which is a good thing).
In a sense, they are indeed very similar. I don’t know any prepaid card issuing bank that does not provide FDIC pass-through insurance to the cardholders. And because all prepaid card issuing banks want their cardholders to be able to receive tax refunds and other federal benefits in their cards, they now offer the newly required consumer protections under Regulation E.
And when you think about it, a checking account is also “prepaid”: unless you deposit money in it first, you can’t use it. Especially since overdraft protection is now tightly controlled.

There are, nevertheless, meaningful differences in the value to you as a consumer, such as Internet and mobile access to your money. Or budgeting tools. Or person to person payments options. Alerts. Cash-back rewards…
The real competition is in the value/price ratio. As a consumer, you need to shop for the best value at the lowest price, as a function of your needs and preferences.

While free and frequent reports like those published by Consumers Union and Bretton Woods are useful compilations of prices that are otherwise difficult to find, they paint only a very partial picture of the marketplace.

Look for descriptions of features and services, and ask yourself what is important to you, as a function of where and how you live.

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.

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

Payday Lending ... no more

In a recent article published by the Huffington Post, I argued that the days of abusive payday lending might be numbered, now that new online services like BillFloat are appearing at a fraction of the cost.

I also lamented that some prepaid card suppliers were cozying up a bit too much to the payday lenders…
Guess what: this week, prepaid card providers NetSpend and AccountNow are finding themselves sans the iAdvance short-term lines of credit with 3 digit yearly APRs that they were tackling to some of their cards.

The Office of Thrift Supervision asked MetaBank, the originator of the iAdvance product  to stop  offering it.

It is difficult to rejoice when your industry neighbors and competitors are getting hit, because the whole industry gets blemished.
As always, market players should always improve by taking the initiative to create better and cheaper products rather than by shedding existing bad products only when forced to.

What this report articulates overall is: even new, born-in-the-21st-century, financial services and products (like prepaid cards) can be more expensive and less people-friendly than they need to be, jeopardizing their potential to be a replacement for 19th-century services like checking accounts.

The report does not analyze the cause for this, but it is really what I have been talking about time and again on this blog: a lot of financial services suppliers are both greedy and incompetent.
Too many fat cats unwilling or unable to use innovation to improve the performance-over-price ratio of what they deliver.

If it was not for poor execution by many companies, here is why prepaid cards are actually a good substitution for checking accounts:

Pay by card

I do have a few specific issues with the Consumers Union report. In the interest of full disclosure, I run a company that provides prepaid cards, and am evidently disappointed that our product (the UPside Visa Prepaid Card) was not mentioned in it. I guess when you want to make a point that products are too expensive and not consumer-friendly enough, leaving out the lowest cost and most complete products available helps strengthen that point.
But, hey, product reviewers have to select a manageable subset and can’t include everybody. And why would I complain that our product is not listed in a rather negative report?

Back to what I think is not entirely justified in the Consumers Union report, in reference to their Policy Recommendations in paragraph V:

• Fees: for sure they ought to be limited and transparent. Overdraft and dormancy fees which are mostly punitive should go away (we don’t have any on UPside cards). However, requesting that paper statements be always provided at no fee or a nominal fee makes little sense in the days of Internet and increasing postage costs. Almost no cardholder is asking for paper statements.
• Rights to re-credits in case of lost or stolen cards: here Consumers Union is confusing the theory – i.e. what Terms & Conditions have to legally say- and the practice – i.e. what companies really do-. Most issuers will re-credit an account that was previously suspended following a loss or theft, rather than risking to lose the cardholder by waiting too long to do it. So most incidents are resolved well beyond what the T&C’s of a cardholder agreement typically say. Requesting that re-credits be systematic, generalized and the same as with bank accounts that often rely on minimum balances and other fees to cover operational costs, is unrealistic.
• Reduce Loss Cap to $50 on all cards, including prepaid. Same as above: most issuers will actually waive loss caps rather than losing a customer, even though they have a lot less headroom to do so with a prepaid card than with a debit or credit card. Forcing alignment of all cards without understanding the underpinning differences in profitability and business models will not work.
• Chargeback Protection. Well, this is not even discussed in the report, so not sure why that point is there, besides juste making the list longer. I am not aware that prepaid card issuers are behaving any differently than issuers of debit cards linked to a checking account.
• FDIC protection. What they mean here is what is called “pass-through” protection, i.e. making it clear that the protection applies to cards individually rather than all the cards in aggregate at the issuer. I agree with this, but let’s remember that no prepaid card reviewed in the report nor any prepaid card that I know of in the US, can exceed a balance of a few $1,000′s. So demanding a $250,000 protection per card is somewhat extreme. I am not sure what the Anti Money Laundering enforcers would think about prepaid cards with balances of up to a quarter million dollars…

Overall, the prepaid card industry has some progress to make and Consumers Union does a good job of keeping stakeholders on their toes. However, giving the impression that all prepaid cards are ‘second tier’ compared to bank accounts, is somewhat unfair to those of us who are trying hard to do better than checking accounts at a lower cost and without the risks of overdrafts.

For the sake of transparency, here is what the UPside Visa fee schedule, as formatted by Consumers Union in Appendix A of their report would have looked like if they had included it: (click on the image to download in PDF format)
And here is the same for the evaluation of the monthly cost: (click on the image to download in PDF format)