Banking UP

On December 16, the Board of Governors of the Federal Reserve System met and proposed a way to implement the debit card interchange fee and routing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Board has requested comment before February 22, 2011, on their proposed rule that would establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions.

Here is a copy of the comment I have sent to the Board:

Secretary,
Board of Governors of the Federal Reserve System,
20^th Street and Constitution Avenue NW
Washington DC 20551

RE: Comments to Docket 1404 – Debit Card Interchange Fee and Routing

I am the CEO of Plastyc Inc., a company devoted to delivering  financial services to the tens of millions of under-banked Americans.
We provide re-loadable prepaid card services in partnership with banks with less than $10B in assets.

Therefore, we are not impacted by the proposed regulations and can comment with the benefit of a position of neutrality.

We are particularly concerned by the un-intended negative consequences which are likely to impact the un-banked, under-banked and low income Americans. Below is a summary of such concerns, and suggestions on how to address them:

I remain at your disposal for any further input you may require.
Very Respectfully Yours,

Patrice Peyret

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.

Our most recent analysis of about 50,000 visits to the UPside Visa prepaid card mobile portal shows that 47% of the card holders are using an Android phone, dwarfing the iPhone which comes in at 16.5%.

Not surprisingly, a majority of prepaid Visa cardholders tend to prefer… prepaid phone accounts too. And since the iPhone only comes with postpaid subscriptions, it is not as popular as the many Android phones that are now available from prepaid wireless carriers.

Another interesting fact is the amount of mobile access: in December, we had about 50,000 visits to our mobile site versus a bit more than 200,000 visits to our “fixed” website: so, for every 5 PC users, we have someone preferring to use their cellphone to manage their money.
It is probably higher than industry averages. We believe that under-banked users will be heavier users of mobile financial services.
This is in part because staying on top of your money at all times from anywhere is more important when you don’t have a lot of money.

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

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.