If you’re broke and hungry with only $10 to spend on dinner, would a $25 all-you-can-eat buffet help? Senator Menendez thinks it will. Or at least the legislation he is introducing appears to indicate that line of thought.
I presented a breakdown of all the fees a prepaid card supplier must pay to make the card run. These fees are directly related to the functions the cardholder performs. Make an ATM transaction, that’s $0.75 to the ATM owner, and probably $0.20 to the processor. Call the automated help line, that’s $0.39 per call. Call the help desk, that’s $1.25 a minute. In short, every action taken by a cardholder costs the prepaid card supplier money.
So a prepaid business has three general approaches it can take.
1. Expose all the actual costs to the cardholder so they know which actions drive up costs.
2. Take the average of “all users” and charge it as the monthly fee.
3. Identify the average monthly balance needed to assure sufficient income (as defined in 2 above) and make that a minimum balance for a “no fee” product offering.
Number three is the method used by banks to make available “free checking.” This has been cited as one of the primary reasons that low and moderate income individuals remain unbanked. This is the pricing model that Prepaid Card Consumer Protection Act (PCCPA) of 2010, sponsored by Senator Robert Menendez (D-NJ), not because checks are free but because they make money on deposited funds. If your balance drops below some specific monthly balance, you get charged a fee. The way most banks operate, you will get charged that fee even if you haven’t done anything that costs the bank money – that is you haven’t written a check or visited the teller. Tough luck, your balance is below the limit so you pay.
Senator Menendez apparently believes that choice number 1 is unfair and only choices 2 and 3 treat the cardholder fairly.
If Senator Menendez’s Bill on Prepaid is passed, Prepaid Financial Services cards will charge higher monthly fees and will have fewer transaction-based fees. So that cardholder that understand the fees and enjoy a low-cost card will be charged more in upfront fees that subsidize those cardholders that make a lot a number of costly transactions. Indeed, by making costly transactions free, despite the fact these transactions drive costs up, it may encourage cardholders to increase this behavior; which would in turn require the monthly fee be increased to cover actual costs.
It is interesting that at the same time Senator Menendez wants to shield users from understanding costs associated with prepaid cards, he is promoting a bill (Clear Airfares Act) intended to make airlines more clearly disclose the fees they charge to consumers. Senator Menendez should take that same approach with prepaid cards and insist of fair disclosure and then leave it up to the consumer to decide which program is best for their usage pattern.