Is Chase the Canary in the Prepaid Coal Mine?

by Ben Jackson 0

J.P. Morgan Chase & Co. plans to end itsbusiness in the payroll and government tax and benefits prepaidsegments. Reuters reported that company plans tosell or wind down its payroll and government benefits programs butretain its Chase Liquid prepaid cards.

Chase plans to leave the payroll and government segments because of”a headache of risks in operations and regulations,” according toan unnamed source in the Reuters article.

The move follows the bank’s exit from the open-loop gift cardsegment. In spring 2013, Chase stopped selling its Visa gift cardsthrough its branches. By September, it had ended all open-loop giftcard sales. The company said at the timethat is decided to get out of the gift card business in order tofocus on other business lines that had better growthpotential.

The question is whether this will be an example of one large bankmaking strategic decisions based on its own business or whetherChase will lead the trend of large banks abandoning certainsegments because the regulatory and business environment havebecome too uncertain to ensure the sustainability of thebusiness.

While the Federal Reserve Board did not mandate interchangereduction or caps on prepaid programs identified as exempt, thenetworks in the process of creating new interchange tables addedfee restrictions and caps on both exempt and nonexempt programs.Payroll programs fall under different laws in every state and comeunder scrutiny in the wake of lawsuit by a McDonald’s worker inPennsylvania. (Chase was not a party to the suit.) The competitionfor government programs has been fierce and the demands made bygovernment agencies have been severe in regards to costs and feesthat can be charged.

It may be that these and other factors will lead all banks toreconsider their prepaid strategies and decide to abandon certainsegments, or leave the business altogether. For a longer discussionof these issues, please see the Mercator Advisory Group Viewpoint: Is Chase a Canary in the Prepaid CoalMine?