Prepaid Debit Cards May Be Next Focus of U.S. Consumer Agency

by Mercator Advisory Group 0

If ever there was a time for the prepaid industry to take action, this article suggests that the time is now should the industry wish to demonstrate an ability to police itself:

“The Consumer Financial Protection Bureau may call for public comments on how to improve fee disclosure by issuers of prepaid debit cards, the fastest- growing segment of the payment-card industry, according to a Treasury Department official.”

Mercator Advisory Group has discussed the very real costs associated with operating a prepaid product with numerous government agencies (see our slides on the FDIC web site), however it isn’t the cost that is visible outside the industry; it’s the fees:

“Rules could squeeze the $1.4 billion in fee revenue that firms such as Wal-Mart Stores Inc., Green Dot Corp. and NetSpend Holdings Inc. will collect by 2014, said Gwenn Bezard, research director of the Boston-based research firm Aite Group. Americans will more than triple the amount they put on the cards each year to $104 billion by then, Aite has calculated.”

Mercator Advisory Group believes that the primary challenge facing the prepaid industry is really about disclosure and transparency – which amazingly enough are also the basic sentiments mirrored by the Consumers Union:

‘Gail Hillebrand, financial services campaign manager for Consumers Union, said the consumer agency needs to consider limiting the number or types of permissible fees so that issuers don’t shift the costs around in response to regulation.

“It’s about truth in pricing, not setting prices,” she said.’

The big discrepancy between Mercator’s position and that of the Consumers Union is that the Consumers Union wants to limit what fees are permissible. This will be a major mistake, especially if it inhibits innovative pricing that can lower consumer costs.

For example, it is particularly dangerous if pricing restrictions decouple cardholder costs from cardholder behavior. For example, ATM transaction costs are a major factor for suppliers. So eliminating the cardholder fees for ATM transactions would force ATM fees to be subsidized by all cardholders which will, in turn, drive costs up even higher. Given the competitive market that exists today, that is getting even more competitive with several major new entrants; our favorite statement speaks to the American trust in free markets:

Already, Bentonville, Arkansas-based Wal-Mart “sent shock waves” through the business when it reduced fees in early 2009 on a prepaid card it markets with Green Dot, Bezard said. And the RushCard also reduced fees early this year.

“I wonder if regulation can change the fact that you already have serious price competition,” Bezard said.

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