How to compare the price of financial services?
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.
