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.

Below is an excellent video created by Bank 2.0 author Brett King.

This is exactly what we are seeing at Plastyc: strivers provide the core of the growth among the under-banked, not fresh immigrants.

Their motivations for being prepaid card accountholders?

• Resetting their finances in a way that avoids further overdrafts (checking accounts) and debt (credit cards)
• Choosing a product that costs less, has good mobile access, and does everything they need

Visa estimates that strivers are about 48MM in the US. A majority of them is Caucasian, 30% African American, and 7% Hispanics.

Read the article by Zachary Ehrlich in MyBankTracker

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)