Reform Of The Prepaid Card: Good Intentions Gone Bad

by Tim Sloane 0

Reinvestment Partners ignores the value ofprepaid debit cards and focuses instead exclusively on cost. Aswith other consumer groups, Adam Rust, Director of Research atReinvestment Partners, has issued a press release and a new report thatpromotes principles that are only valid when it is assumed thatthese cards are comparable to a bank account – but they aren’tbecause prepaid debit cards offer greater liquidity and convenienceand are also available to individuals shunned by traditionalfinancial institutions. Rust is quoted in the press release:

“Until all prepaid cards are safe, affordable,and fully functional,” says Adam Rust, Director of Research atReinvestment Partners, “they will still be a less-than-optimalsubstitute for a regular checking account. The reformed prepaidcard will give consumers the services they need while protectingthem from excessive fees, high-cost credit, and confusingdisclosures.”
What Rust means by “safe, affordable, and fully functional” isconfusing in that Mercator consumer research, as well as researchperformed by others, clearly indicates cardholders are extremelyhappy with the prepaid debit cards they have so these cards appearto be functioning perfectly for those that like them. This shouldcome as no surprise in that funds can be deposited on these cardsand cash withdrawn at far more locations than associated with bankbranches or bank ATMs.

Indeed, research I conducted and published in the report “Graspingthe Benefits of Prepaid: A Battle Plan for Banks” shows that forthree zip codes in the low and moderate income neighborhood ofStockton California, there were more than four Green Dot locationsfor every one Bank of America location, and there wasn’t one creditunion to be found.

Rust also brought up the issue of credit associated with prepaiddebit cards:

No credit: Until recently, one bank offered aline of credit with an APR of more than 120 percent on its prepaidcards. That is not right. The prepaid card should be a safe harborfrom high-cost credit and from any overdraftpenalties.
Rust is willing to eliminate the ability for those with low andmoderate income to get the credit they need because of one solutionthat was, from his perspective, overpriced. I say “from hisperspective,” not because I believe the fees charged were low, butonly because the fees were lower than those charged by most pay dayloan stores. I would advocate more loans be made available to thosewith low and moderate income, through any avenue, as long as therate is fair and has controls that assure the consumer won’t entera spiral of loans used to pay each other off – but then these areprinciples that are already well know and promoted by others.

The one area in this press release that makes perfect sense is therecommendation that disclosures be made in a form that enables easycomparison of the products:

They should have clear and complete disclosuresthat share common terms with other cards so that consumers cancomparison shop for their card that bests suits theirneeds.
But this isn’t new. The idea has been promoted for years by theNBPCA, which has a Disclosure Policy, andby CFSI, which recently made specific recommendations for a fee boxthat is in pilot testing with severalprepaid program managers, including Green Dot.