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Say Goodbye to Inclusion ByFIs
Consumer protection rules put inplace by the Federal Reserve Board (RegE) to reduce overdraft feeshave already impacted the availability of “Free Checking.” Whilethese rules had minimal impact on a bank’s income statement, theystill had a significant impact. According to the Bankrate’s 2010Checking Study “the percentage of checking accounts considered”free,” that is accounts with no monthly service charges and nominimum balance, fell from 76 percent in last year’s study to 65percent in this year’s study. The drop reverses a steady increaseof free checking accounts dating back to at least 2003.” Thisdecline in “Free Checking” will shortly increase as banksbrace for the consequences of the Durbin Amendment introduced as aprovision in the Dodd-Frank Wall Street Reform and Consumer Protection Act passed earlier this year. If RegEslightly decreased availability of “Free Checking” then the DurbinAmendment will obliterate it. Expect banks to substantiallyincrease the average monthly balance needed for “Free Checking”while also increasing the monthly cost of a standard checkingaccount. If the unbanked and underserved thought banks were tooexpensive in the past, these legislative actions will make abanking relationship increasingly unattainable.
But the Democrats aren’tdone, where there was a glimmer of hope that Prepaid FinancialServices would offer the unbanked and underserved an avenue forinclusion, new legislation queued up for 2011 will likelyextinguish that hope in the name of consumer protection.
Say Goodbye to Low Cost PrepaidFinancial Services
S.4041 was introduced by SenatorMenendez of New Jersey during this year’s lame duck congressionalsession. The Senator declares the perceived need for thislegislation in the subtitle of his press release: “RecentKardashian Kard controversy illustrates problem of hidden fees withthis type of card.” He makes this statement despite the fact theKardashian Kard’s public relations nightmare was driven primarilyby the well-disclosed, and one might argue insane, one-time annualcost 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 thiscard, but let’s face it, it was the $99.95 that got everyone tolook at this card more closely and now Senator Menendez hasintroduced S.4041 that will similarly increase the costs associatedwith all Prepaid Financial Services cards by eliminatingtransactional fees.
Usage Fees Control Costs ByRegulating Consumption
The government frequently uses feesto regulate consumption by directly linking the cost toconsumption. This age-old model makes sure that the individualsusing the service also pay for the service. The other side of thisequation is that consumers that want to reduce costs can simplyavoid using the service. Animal control is paid by pet ownersthrough licenses. Increased social costs are paid by taxes onalcohol and tobacco products that also reduce usage. Highways arefunded to a large degree by those that drive through tolls. This isthe predominant pricing model used by prepaid card suppliers today.Since using any ATM is expensive, in-network or not, the cardholderis charged a fee for each ATM transaction. A purchase using PINdebit reduces the income a prepaid supplier receives to operate thecard, so some (not all) charge a fee when a cardholder uses PINdebit instead of signature debit. These fees steer the cardholderaway from expensive behavior, and as such, it is in the supplier’sbest interests to make sure the consumer knows exactly what thosefees are. But legislators apparently feel fees are unfair to theconsumer, so let’s consider what S.4041 has to offercardholders.
By eliminating fee-based pricing,consumers will no longer be charged a wide range of transactionalfees. Instead suppliers will estimate the average transactionalcost-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 inthe contract will now pay more
- Cardholders that made a large number of fee-based transactionswill now pay less
- All cardholders will pay a higher monthly, semi-annual, orannual fee
- Since cardholders are no longer restrained by fees, there willlikely be an increase in these expensive transactions escalatingthe monthly, semi-annual, or annual fee
I have argued that the prepaidindustry has not done enough to regulate itself and even urgedaction against the Kardashian Kard (not because of the cost, butbecause the signup process did not disclose that a mobile accountwas required or disclose the exact cost prior to collecting paymentdata through Mobile Mone). By failing to regulate itself, theprepaid card industry has driven our elected officials to takeaction – actions that I consider ill-informed and harmful to theunbanked and underserved.
My simple proposal to protectconsumers purchasing a Prepaid Financial Services product isthis.
- Regulate disclosure. Anything that changes the account balance,other than a consumer-initiated payment, must be clearly andconspicuously communicated prior to purchase.
- Require every Prepaid Financial Services product include a tagthat displays the average cost. This would be an EPA-like tag foundon appliances for annual power consumption. This would be a programfunded by the card industry that would label every card. The labelwould display the average cost for three or four typical usagescenarios (Direct Deposit/1 ATM, Direct Deposit/8 ATM, CheckDeposit/4ATM, etc). The label would make comparison shopping easierand safer for consumers that fail to make their own informeddecisions.
My plea to Senators Menendez,Durbin, and Merkley: Please don’t force the industry to adopt theKardashian Kard pricing model, instead define a disclosuremethodology that enables free market forces to shape the prepaidindustry.