Mercator Perspectives

Indicting Prepaid As a Whole; Despite Specific Evidence to the Contrary

In a recent article, “The Coming Wave of Non-Credit Cards” Time Magazine introduces its readers to the new American Express Reloadable Prepaid Card that delivers a free transactional card account to everyone as long as they only use the ATM once a month.

It’s unfortunate that often, the mainstream media fails to take the time to understand the cost, risk, and complexity of offering an open-loop prepaid card program. Due to this lack of understanding inaccurate information can be reported and pot shots are sometimes taken at the industry – even on a product as affordable as the new American Express prepaid card.

For example, the author of this article selects incorrect news from a variety of sources about a variety of products, overshadowing the benefits of this game changing offering.
“We predicted that more major financial institutions would launch prepaid debit cards in response to the combination of increased regulation and a ballooning number of people who can’t get a credit or debit card. American Express is the first marquee credit card name out of the gate with the debut of its reloadable prepaid card.

This one is a little different from many other prepaid offerings currently on the market in that it doesn’t really seem set up to be a substitute for a bank account; for instance, you can only have a maximum of $2,500 on the card, and loading cash onto it is a cumbersome process. AmEx tells The New York Times it plans to let customers load the card via direct deposit in the future, but for now, the easiest way to load funds onto the card is online, via an existing checking account.

AmEx is touting its relative lack of fees as a selling point, aware that consumers — and lawmakers — are starting to get wise to the death-by-paper-cuts parade of $1 or $2 fees many prepaid debit cards carry. Five of the industry’s largest prepaid companies — First Data Corp, Green Dot Corp., Account Now Inc., NetSpend Corp., and Unirush Financial Services LLC — have until next Monday to provide information to Florida’s Attorney General, according to Reuters. The state is investigating the companies for deceptive and unfair business practices centering around inadequate or nondisclosure of fees. Two of the companies are also being investigated for claims that their products can help people raise their credit scores (they can’t).

Statements, as those above, find suppliers guilty. American Express delivers an electronic version of “free checking” for every American, a goal thought impossible, and yet they remain a target for criticism: “Clearly, excessive fees are a problem when it comes to prepaid debit cards, but there’s an even bigger reason for consumers to be wary of this and the many other bank-backed prepaid cards we predict will hit the market in the coming months: The laws that protect you if your credit or debit card is used fraudulently don’t extend to prepaid cards. While an individual issuer can offer customers zero liability, that’s wholly at their discretion and can be rescinded at any time.

In addition, the FDIC insurance that protects your money in the event of a bank failure isn’t guaranteed with prepaid debit cards. If the institution that issued your prepaid debit card declares bankruptcy, whether or not you have a prayer of ever seeing that money again depends on how the company organized its customers’ funds. If the money is pooled into an aggregate account, a common occurrence, consumers could lose the right to reimbursement. A 2010 Consumers Union report warns, “Some of the fine print by card issuers tell consumers that the money is not insured,” but it’s not always easy for cardholders to make this determination.”
The author has confused Zero Liability, a network offering, with Regulation E, which is a bank regulatory requirement. Regardless which one the author is discussing, it is rarely as easy as described here for a protection to be removed from a cardholder.

Networks defend their brand with vigor, and every network approves all marketing collateral and Terms & Conditions before it will allow a prepaid program to be released. No prepaid program manager can decide on a whim to no longer support Zero Liability or other protections they once offered. If a program manager wants to change existing terms and conditions, they must complete a network re-review. If the changes are significant, the networks typically require the program manager to operate two portfolios. The initial portfolio must remain unchanged to support existing customers under the old terms. The program manager can then open a new portfolio using the new terms, but to move all existing cardholders to the new terms, the program manager must re-issue all the cards – which would both alert the cardholder to the new terms and conditions and cost the program manager a lot of money.

The author’s last misplaced complaint is this:
“What’s more, unlike credit or debit cards connected to a deposit account, the prepaid ones won’t help you establish or strengthen your credit history, which could hurt your chances to get a loan or open a bank account in the future. This is the other major beef I have with prepaid debit cards. They relegate users to second-class status and don’t give them any kind of on-ramp to the financial mainstream.” The author seems to be unaware that only timely payment of credit will impact a credit score, and so DDA accounts and prepaid accounts are irrelevant to her argument. DDA activity is only reported to credit agencies when significant negative events take place, so a prepaid cardholder loses nothing in credit reporting when adopting a prepaid account over a DDA.

While there may be bad actors in the prepaid market, as in every other large market, American Express sure isn’t one of them. The American Express prepaid card will have a huge impact on the market. It will drive price points lower and drive service levels higher for all prepaid products – and every prepaid consumer will benefit by shopping around.

Read The Coming Wave of Non-Credit Cards in its entirety:


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