Banking UP

As this is my last posting of the year 2011 on the Banking Up blog, I realize that our prevailing customer theme and product trend for the year was all about one thing: saving money.

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.

Good advice from Charlotte Stallings on My Fox Houston about reloadable prepaid cards:

• 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

Many in the payment industry have complained that fees for payment cards or for checking accounts are difficult to figure out.  So much so that respectable institutions like Bretton Woods and Consumers Union have published contradictory conclusions about which products are the least or the most expensive, while looking at pretty much the same set of products.

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.

Consumers Union has just published a new report entitled “Adding It All Up: How Prepaid Card Fees Compare to Checking Account Fees“. The report mostly sides with checking accounts and criticizes prepaid cards as more expensive.

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.

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.