Consumer groups and legislators argue prepaidfees are unfair, as if there were no costs involved in deliveringthe benefits that low and moderate income users enjoy when usingprepaid products. These are the features the unbanked andunderserved need and want, and these features increase the cost ofdelivering a prepaid service:
1) Cardholders finally have access tofinancial services in their community – and likely within 1,000feet of where they both live and work. Putting a cash-basedfinancial service into high crime areas within inner city locationsis expensive; this is why you don’t often find banks or creditunions located there. To make prepaid available within the innercity requires a complex distribution network and revenue sharingagreements to appropriately compensate the local merchants makingthe services available. As a result, program managers deliver moreservices directly into inner city locations than is available fromany bank or credit union.
2) Location: The unbanked and underserved work more jobs and longerhours for less compensation. They know the value of time and moneymore than most. These individuals are willing to pay a transactionfee for the convenience of banking at the local store that istypically within a few hundred feet of where they live, work andshop. Free checking isn’t available in these locations and won’t besince doing so would be economically impossible – the cost is toohigh and the average account balance too low. Eliminatingtransactions fees will eliminate prepaid from theselocations.
3) Timing is everything: As already discussed, the unbanked andunderserved work more jobs and work longer hours and as a resultthey can’t just walk to the bank between 9 a.m. and 5 p.m. GreenDot reload statistics show the greatest activity is between 7 p.m.and 1 a.m., with a surge of activity after second shift at 1 a.m.At the Card Forum conference in early April, NetSpend indicated itsaw similar patterns. Not only are banks lacking in theneighborhood, they don’t keep these hours even in high incomeareas. Merchants that sell prepaid services are commonly open untilmidnight, while many are open around the clock.
4) Transaction fees make the prepaid value proposition clearbecause fees are only charged for the services the cardholders useand eliminate surprise costs associated with negative balances.Free checking is about selling other services to the customer,since providing a checking account costs substantially more than”free.” “Free prepaid cards” are possible, but only if the cost ofproducing and servicing the card provided for free can be recoveredsomeplace else – it’s an age old trick. Get a free razor; buy theblades. Get a low cost printer; buy the high priced ink. Receive alow cost prepaid financial services product; then be ready for aproduct that offers credit or other products and services that thatearn more revenue – some of which may not be aligned with the bestinterests of the unbanked and underserved.
The prepaid market is bifurcating. Prepaid products are now soldin banks, online, and at retail locations and are priced fromalmost free to $9.95. Some have surcharge free ATM access in innercity locations, some don’t. Some have service locations withininner city merchant locations and some don’t. Some charge a fee forevery transaction that generates a cost and some don’t. Thesealternatives all strike a balance between the cost of servicedelivery versus the revenue derived from thecardholder/portfolio.
If the cardholders are predominantly high income andauto-depositing paychecks onto the card while also using the cardextensively at merchants, then fees can be kept low. If thecardholders are predominantly low income and are paid by check orcash which also limits card usage, then income is limited and theprogram manager must charge higher fees or find new revenuesources.
If fees are capped, then program managers must find a way toreduce costs or increase revenue from cardholders (perhaps byabandoning low-income cardholders, or adding new services for afee) or a bit of both. Reduced income in any scenario will come atthe expense of a physical presence in specific geographies. Sincethe LMI neighborhood is the most expensive to service, the unbankedand underserved would almost certainly see fewer prepaid financialservices available near their home and workplace.
Almost everyone has paid $3, or even more, to pull cash from aconvenient ATM. A restriction on fees will eliminate prepaidproducts from low and moderate income neighborhoods and reduceconsumer choice. As such, the effort to apply fee restrictions mayas well be funded by the shoe and no-doze industries. Theelimination of prepaid services from low and moderate incomeneighborhoods will force the unbanked and underserved to walkfarther and stay up later than they already do and they will nolonger have the option of paying slightly more to gain thesevaluable conveniences.
