Banking UP

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.

Here is a re-posting of an article I wrote for the Huffington Post.

“Earn it before you spend it.” Like most parents, I have been giving this basic money management advice to my two children since they moved beyond the pocket-money stage and started economic lives of their own.

Now the financial crisis has breathed new life into this old adage. As consumers, we’re moving away from huge mortgages and over-loaded credit cards as a way of life and going back to the basic patterns of our late teens and early twenties: stash our earnings, spend some, earn more, stash more, repeat.

This is good. Basic money management — spending only what we earn as opposed to digging ourselves into a big hole of debt – will help solve a lot of personal finance problems. Because, as we all know, the interest on debt, especially credit card debt, costs a lot.

But eliminating debt is not enough. Even the basics of earning money and spending it using a standard checking account can cost a lot. A recent study by management advisory firm Bretton Woods, Inc. measures the yearly cost of bank checking accounts between $200 and $350 based on basic usage patterns mentioned by the Office of the Comptroller of the Currency and by a Consumer Union Report in prior surveys.

So we’re paying a median of $275 every year just to move money in and out of a basic checking account.

When we are young, before we start serious saving or equally serious borrowing to finance kids and buy houses, a checking account is our primary banking service. So, if, like my kids, you are one of 51 million people in the U.S. between the ages of 18 and 29, you are unknowingly spending a collective $10 billion to $17 billion in checking account fees yearly.

What if you kept those billions in your pockets instead of lining bankers’ pockets? That would be a substantial and immediately useful stimulus package.

Beyond the Basic Checking Account

One alternative is to use cash for everything. But if you’re cash-based, chances are that on payday your employer will give you a paper check that you will have to cash at some check-cashing place, where you will pay a substantial fee for the service. The same Bretton Woods study shows the cost of cash-only living to be between $165 and $315 per year. That’s not much of an improvement compared to basic bank accounts.

Another alternative is to opt for prepaid card accounts. According to Bretton Woods, consumers who choose a network-branded prepaid card could pay 35-70 percent less in fees than if they use low-balance checking and debit accounts, making prepaid cards a far more cost-effective, valuable financial tool for many.

There are many sources of prepaid accounts. Some non-for-profit organizations like the Community Financial Resources offer a one dollar per month prepaid card, which, when used occasionally for ATM withdrawals, amounts to about $50 per year. Credit Unions also strive to offer lower-cost services than traditional banks. They tend to be less Internet-ready than larger institutions, but several of them have low-cost prepaid cards that you can manage online.

And a new generation of online-only prepaid accounts offers many of the same services of a traditional checking account but with fewer fees and constraints. If you shop carefully and choose a service that offers FDIC insurance, you’ll get the same level of safety as a bank checking account. There’s no retail bank to visit, but you can log-in anytime via any Internet-connected PC or cell phone, and get email support at no cost.

How much exactly can you save? The example I know best is the iBankUP service offered by my company: its yearly cost for a usage pattern similar to the Bretton Woods study is $55. This is about $220 less than the median price of a checking account.

Using this kind of service instead of a bank checking account, the 51 million people in the 18 to 29 age range would collectively save $11 billion.

Finally, an $11 billion stimulus package from the banks to American consumers, not the other way round.

Modern cars have a reliable fuel gauge. Actually, they have a conservative fuel gauge: when the empty light goes on, you still have ample miles to go, so that you can find a gas station before it is too late.

Money Gauge

Not so with your bank account: even if you have online – or cell phone- access to your account, you just don’t know how much money is really left. Recent credit card transactions may not have settled yet. Checks you wrote may not have been cashed. So, your balance is usually optimistic and you don’t have as much money available as you are being told.

Your bank likes it that way: it will earn more interest on your unpaid card balance and collect fees on your unexpected overdrafts.

Collectively, banks are expecting to rack up $27B in checking account overdraft fees for the year 2009 alone.

Could your money have an accurate gauge?

If you go for an online account based on a prepaid card, like iBankUP, your balance will be accurate, thanks to the prepaid nature of the service.

As purchases are made, the balance is automatically adjusted downwards.

If you write a check against the balance of the card account, the amount of the check is also reflected right away, instead of waiting for the check to be cashed by the recipient.

You get a “no-surprise balance”. Whenever the balance is slightly off, it actually displays a lower amount than really available, either because an authorization hold from a restaurant (or, ironically, a self-serve pump at a gas station) has not been removed yet, or because a check expires or remains un-cashed.