Banking Up Blog

Did you notice? After years of being two separate product lines, prepaid card accounts and checking accounts are merging into a single new offering:

• American Express calls Bluebird ”The Checking & Debit Alternative by American Express”
• Simple‘s tag line is “Worry-Free Alternative to Traditional Banking”
• GoBank‘s pitches itself as “A New Kind of Checking Account”
• … and of course, at Plastyc, we have had UPside and iBankUP providing “The Power of a Bank Account in a Phone” for a few years now

All the above products are built from a prepaid card foundation, with multiple add-ons to expand their usefulness, not the least of which is a mobile application that turns customers’ smartphones into mobile checkbooks.

The convergence comes after a number of changes in best practices, regulations and innovations for prepaid cards:

• FDIC “pass-through” insurance applies to individual prepaid card accounts
• Prepaid cards are routable via ACH allows direct deposits and bank transfers
• Cards able to receive federal funds have Reg E consumer protection
• On-demand paper checks enable payments to anyone
• New services like Walmart’s Rapid Reload™ allow cashing checks directly into cards at low costs
• Mobile Remote Deposit Capture allows depositing of paper checks 24×7

This results is an all-around equivalence between checking accounts and prepaid card accounts, from a consumer stand-point.

Even major market players like H&R Block are deploying prepaid-based financial services that provide a full-blown replacement for a checking account: look at the Emerald Card, which is now available with optional access to a line of credit product called Emerald Advance and a Savings accounts

How should banks react to this new market reality? I believe they should think hard about introducing “prepaid as the new checking” if they want to serve more customers at a lower cost.

Below is a set of slides that I am presenting to Financial Institutions during a webinar hosted on January 31 2013 by Andera, to explain how to leverage prepaid cards to deliver checking account services to everyone:

As a veteran of the wireless phone industry, I get irritated when new business partners start a discussion with a lecture on how fast the mobile world is expanding. The cellphone is the fastest-growing consumer device ever… African villagers are getting paid at the open air market through their cell phones… I know, I know.

But I have to admit being inconsistent: I get even more annoyed when other people presume that a large part of the potential customers for Plastyc’s prepaid-based banking services have either no cellphone or no data plan on it.

This week, I stumbled on a forecast by telecom giant Ericsson in the Special Report section of The Economist which illustrates how amazing the expansion of the mobile world really is, with stunning graphics.

Here it is:

(from the Oct 27th 2012 issue of The Economist)

While I have argued in a prior post that mobile wallets that allow people to pay at the point of sale are still not ready for widespread use by the general public, there is no doubt that the banking industry had better accelerate its deployment of mobile access for both its customers and employees. This includes:

• tablet and mobile applications for customers to access their accounts (or open new ones)
• tablet applications for branch employees to deliver customer support
• tablet and mobile replacement of counter-top point-of-sale terminals
• pushing brick-and-mortar check cashers out of business by offering mobile deposit capture of paper checks from mobile phones
• replacing the store racks full of plastic cards dangling from j-hooks with instantly-issued stored-value applications loaded into cellphones

I am going to buy some reprints of The Economist article to distribute around at some of my next business meetings.

The US Federal Reserve has just released a report about how consumers use mobile financial services.

The full report can be found here.

It contains a substantial section about how the under-banked population uses mobile phones to access financial services.

Just because people are un-banked or under-banked, does not mean that they are “unphoned”.

Mobile phone use is high among younger generations, minorities, and those with low levels of income—groups that are prone to be unbanked or underbanked.Mobile banking and mobile payments have the potential to expand financial access to the unbanked and underbanked by reducing transaction costs and increasing the accessibility of financial
products and services.

Although the report contains some contradictory numbers, it mentions that 91 percent of the underbanked have a mobile phone and 57 percent have a smartphone—rates far above those for the overall population.

As mentioned in an earlier post, we found that over 85% of the UPside Visa prepaid card users have a smartphone.
So we have just deployed a mobile banking application for both Android phones and iPhones.

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.

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.