Say Goodbye to Inclusion By FIs
Consumer protection rules put in place by the Federal Reserve Board (RegE) to reduce overdraft fees have already impacted the availability of “Free Checking.” While these rules had minimal impact on a bank's income statement, they still had a significant impact. According to the Bankrate’s 2010 Checking Study “the percentage of checking accounts considered "free," that is accounts with no monthly service charges and no minimum balance, fell from 76 percent in last year's study to 65 percent in this year's study. The drop reverses a steady increase of free checking accounts dating back to at least 2003.” This decline in “Free Checking” will shortly increase as banks brace for the consequences of the Durbin Amendment introduced as a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act passed earlier this year. If RegE slightly decreased availability of “Free Checking” then the Durbin Amendment will obliterate it. Expect banks to substantially increase the average monthly balance needed for “Free Checking” while also increasing the monthly cost of a standard checking account. If the unbanked and underserved thought banks were too expensive in the past, these legislative actions will make a banking relationship increasingly unattainable.
But the Democrats aren’t done, where there was a glimmer of hope that Prepaid Financial Services would offer the unbanked and underserved an avenue for inclusion, new legislation queued up for 2011 will likely extinguish that hope in the name of consumer protection.
Say Goodbye to Low Cost Prepaid Financial Services
S.4041 was introduced by Senator Menendez of New Jersey during this year’s lame duck congressional session. The Senator declares the perceived need for this legislation in the subtitle of his press release: “Recent Kardashian Kard controversy illustrates problem of hidden fees with this type of card.” He makes this statement despite the fact the Kardashian Kard’s public relations nightmare was driven primarily by the well-disclosed, and one might argue insane, one-time annual cost of $99.95 or semi-annual cost of 59.95 (which averages out to $8.33 or $9.99 a month). There were other fees associated with this card, but let’s face it, it was the $99.95 that got everyone to look at this card more closely and now Senator Menendez has introduced S.4041 that will similarly increase the costs associated with all Prepaid Financial Services cards by eliminating transactional fees.
Usage Fees Control Costs By Regulating Consumption
The government frequently uses fees to regulate consumption by directly linking the cost to consumption. This age-old model makes sure that the individuals using the service also pay for the service. The other side of this equation is that consumers that want to reduce costs can simply avoid using the service. Animal control is paid by pet owners through licenses. Increased social costs are paid by taxes on alcohol and tobacco products that also reduce usage. Highways are funded to a large degree by those that drive through tolls. This is the predominant pricing model used by prepaid card suppliers today. Since using any ATM is expensive, in-network or not, the cardholder is charged a fee for each ATM transaction. A purchase using PIN debit reduces the income a prepaid supplier receives to operate the card, so some (not all) charge a fee when a cardholder uses PIN debit instead of signature debit. These fees steer the cardholder away from expensive behavior, and as such, it is in the supplier's best interests to make sure the consumer knows exactly what those fees are. But legislators apparently feel fees are unfair to the consumer, so let’s consider what S.4041 has to offer cardholders.
By eliminating fee-based pricing, consumers will no longer be charged a wide range of transactional fees. Instead suppliers will estimate the average transactional cost-per-user and charge that amount as a monthly or annual fee – the same model used by the Kardashian Kard. As a result:
- Cardholders that kept costs low by avoiding fees documented in the contract will now pay more
- Cardholders that made a large number of fee-based transactions will now pay less
- All cardholders will pay a higher monthly, semi-annual, or annual fee
- Since cardholders are no longer restrained by fees, there will likely be an increase in these expensive transactions escalating the monthly, semi-annual, or annual fee
I have argued that the prepaid industry has not done enough to regulate itself and even urged action against the Kardashian Kard (not because of the cost, but because the signup process did not disclose that a mobile account was required or disclose the exact cost prior to collecting payment data through Mobile Mone). By failing to regulate itself, the prepaid card industry has driven our elected officials to take action – actions that I consider ill-informed and harmful to the unbanked and underserved.
My simple proposal to protect consumers purchasing a Prepaid Financial Services product is this.
- Regulate disclosure. Anything that changes the account balance, other than a consumer-initiated payment, must be clearly and conspicuously communicated prior to purchase.
- Require every Prepaid Financial Services product include a tag that displays the average cost. This would be an EPA-like tag found on appliances for annual power consumption. This would be a program funded by the card industry that would label every card. The label would display the average cost for three or four typical usage scenarios (Direct Deposit/1 ATM, Direct Deposit/8 ATM, Check Deposit/4ATM, etc). The label would make comparison shopping easier and safer for consumers that fail to make their own informed decisions.
My plea to Senators Menendez, Durbin, and Merkley: Please don’t force the industry to adopt the Kardashian Kard pricing model, instead define a disclosure methodology that enables free market forces to shape the prepaid industry.