Banking Up Blog

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.

If you thought the days of stuffing your inbox with sleazy bank card offers were over, think again.

The team at UniRush is now relying on automated programs to spam the world via Twitter. OK, maybe they are not doing it directly themselves and are recruiting affiliates to do this on their behalf. A tweet about every 10 minutes…

What are they thinking? As usual, Russell Simmons is on TV and in the press defending his good intentions, while looking the other way when his team is acting sleazy, selling one of the most expansive prepaid cards through any means, no matter how unsavory.

Two weeks ago, New York City got a chance to celebrate the launch of Like Us Entertainment and enjoy exclusive audio trailers of the new college radio soap opera, The Like Us Show,  at Stir Lounge, in mid town Manhattan.

Targeting young adults, Like Us Entertainment has created a radio soap opera dealing with current issues college students face. The Like Us radio show, which started airing February 1, 2010 at college radio stations across the nation, addresses topics such as Abusive relationships, Eating disorders, Finances, Peer pressure, Substance abuse, and, of course money. The episodic radio drama revolves around three college girls, attending the fictional ‘historical black university’ Atlanta University, whose social and personal lives drastically change after an unthinkable tragedy. This is the first coming of age radio drama featuring an all African-American cast.

Like Us Entertainment, a production company specializing in TV, film, and radio, was founded by CEO Shirley Vernae Williams in an effort to fill a void in the African-American and ethnic entertainment industry. She wanted to offer a solution to the lack of minorities in programming and management. Targeting young adults, Like Us Entertainment has teamed up with Kristen V. Carter, former writer of MTV’s “America’s Next Best Dance Crew” and BET’s “The Black Carpet”, to present “Like Us”. Like Us Entertainment is working to accomplish its main mission of addressing the cultural and social issues affecting today’s youth, and maximizing African-American presence in images, roles, and entertainment.

My company, Plastyc, chose to sponsor the launch of the Like Us Show, because money matters are one of the main struggles for African-American students. Even more so now that the Credit CARD Act of 2009 is taking effect, and will restrict access to credit cards to anyone under the age of 21.

Russell Simmons’ Rush Card prepaid Visa card has been pretty much the only offering so far, targeted at African-Americans.

It turns out that the Rush Card is in fact one of the most expensive ways to manage money. It comes loaded with fees, either for each payment transaction or for monthly maintenance, at rates that are astoundingly high.

Check my previous post entitled “Not Quite Robin Hood…” to know more about which services have which fees

Hypocritical greed…

At least, Gordon Gecko, the character played by Michael Douglas in the 1987 movie “Wall Street”, was admitting it openly: “greed is good”.

Many providers of financial services for the underserved and disadvantaged seem to be sharing this motto, but they are very covert about it. Of course, they would like to be seen as acting for the greater good of their non-privileged customers, but the price of their products screams otherwise.

Take those prepaid cards supposed to help new residents or un-banked people achieve the American dream: they are precisely those with the highest purchase prices and with the outrageously named “convenience” fees levied at every transaction.

This is Robin Hood in reverse: wealth is being transferred from the less fortunate to the rich -and sometimes famous-, all under the pretense of doing some good.

…combined with shameless exploitation…

Unscrupulous service providers are taking advantage of the simple fact that under-served people are also often “under-complaining”: there is almost no risk of being sued or publicly lashed by consumers with limited access to the media, who can’t afford lawyers, or are simply afraid or ashamed of being publicly identified as victims.

The result? Fees and charges imposed on those who can least afford them.

OK, so maybe the shameless exploitation of under-served, under-complaining customers doesn’t necessarily have its roots only in hypocrisy and greed. In fact, another big culprit is complacency.

… all fueled by pervasive complacency

As I have argued in an earlier post, banks and financial services providers tend to preserve the status quo of an inefficient industry with too many intermediaries and too many Vice Presidents.

Very few market players have the discipline and willingness to structure themselves leanly and resourcefully. Newer entrants are often – but not always- at an advantage because they don’t have to shed a legacy of prior business and process structures.

So, who’s wearing which hat?

The great thing about financial products like consumer prepaid cards is that fees must be posted visibly on websites; this is mandated by the payment networks and by regulations. So anyone can go and see for themselves how much various products will cost them.

Below is a ranking chart based on published fees as of November 12, 2009. The “tips of the hats” are admittedly un-scientific, but the dollar numbers are.

And here below are the same numbers, as  a percentage of the money circulated in the cards, assuming a monthly circulation of $320 on average.