Banking UP

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.

Last week, Consumers Union (the non-for-profit publishers of Consumer Reports) provided an update to their September 2009 study of Prepaid Cards, somewhat provocatively entitled “Prepaid Cards: Second-Tier Bank Account Substitutes?”
Click here to download the new report.

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)

Russell Simmons was all over the press last week, doing damage control about his RushCard prepaid card and its plethora of fees. He was reacting to journalists highlighting that, while he was in front of cameras in Washington fighting against the Durbin amendment about debit card interchange fees, his company UniRush was busy gouging its cardholders with an unbelievable array of fees.

Simmons accused journalists of mis-reading the table of fees listed in the terms and conditions of the card on the RushCard website and of mixing up fees for the “pay as you go” card with the fees of the “pay monthly” program to make the card appear more expansive than it really is.

Well, he missed the irony that both plans are charging “as you go”, and that there is no option to pay upfront for all services, contrary to his allegation that his cardholders could opt to buy up the card, like car shoppers would just buy a car upfront and not have to may for a monthly lease or loan reimbursement.

He even asked for a correction to be published by those publications.

Anyone can check the fee table for themselves at http://www.rushcard.com/cardholder.aspx

Here is what Robert Schmidt and Patrick O’Connor of  Bloomberg Business Week wrote in their article “How Russell Simmons Out-Lobbied Big Banks“:

Unmentioned are the fees Simmons’ company imposes for its cards, including:

• a $9.95 monthly charge (correct: pay monthly plan)
• a $3 activation fee (correct: pay monthly plan)
• $1 for every purchase if a PIN is used (correct: pay monthly plan)
• $1 for online bill paying (correct: pay monthly plan; the journalist was generous enough not to mention that just enrolling for bill payment is $2)
• $0.50 to check your balance at the ATM (correct: pay monthly plan)

So the list of fees reported by Business Week is 100% correct, and they have not attempted to mix fees from various plans to make the cards appear more expansive than they really are.

Simmons also acted as if he was being insulted by his product being called a “prepaid card”. Well, the very title of the product’s website is:

“RushCard | Prepaid card | Prepaid Debit Card | Prepaid Visa | Prepaid Credit Card”

So, dear Russell Simmons, you certainly have excellent intentions, but the folks at UniRush are doing a terrible job with one of the most expansive products in the marketplace. No amount of spinning efforts on your part will change the fact that your card is among the worst choices for the very people you claim to be helping.

Start by cleaning up shop in Cincinatti.

The Daily Show’s Wyatt Cenac examines Bank of America’s hidden credit card fees with a former employee and a mafia loan shark.