Senator Menendez Bill On Prepaid: Driving Higher Costs for the Disadvantaged While Protecting Big Banks

by Tim Sloane 0

If you’re broke and hungry with only $10 to spend ondinner, would a $25 all-you-can-eat buffet help? Senator Menendezthinks it will. Or at least the legislation he is introducingappears to indicate that line of thought.

I presented a breakdown of all the fees a prepaid cardsupplier must pay to make the card run. These fees are directlyrelated to the functions the cardholder performs. Make an ATMtransaction, that’s $0.75 to the ATM owner, and probably $0.20 tothe processor. Call the automated help line, that’s $0.39 per call.Call the help desk, that’s $1.25 a minute. In short, every actiontaken by a cardholder costs the prepaid card suppliermoney.

So a prepaid business has three general approaches it cantake.

1. Expose all the actual costs to the cardholderso they know which actions drive up costs.

2. Take the average of “all users” and charge itas the monthly fee.

3. Identify the average monthly balance needed toassure sufficient income (as defined in 2 above) and make that aminimum balance for a “no fee” productoffering.

Number three is the method used by banks to make available”free checking.” This has been cited as one of the primary reasonsthat low and moderate income individuals remain unbanked. This isthe pricing model that Prepaid Card Consumer Protection Act(PCCPA) of 2010, sponsored by Senator Robert Menendez (D-NJ), not becausechecks are free but because they make money on deposited funds. Ifyour balance drops below some specific monthly balance, you getcharged a fee. The way most banks operate, you will get chargedthat fee even if you haven’t done anything that costs the bankmoney – that is you haven’t written a check or visited the teller.Tough luck, your balance is below the limit so you pay.

Senator Menendez apparently believes that choice number 1is unfair and only choices 2 and 3 treat the cardholderfairly.

If Senator Menendez’s Bill on Prepaid is passed, PrepaidFinancial Services cards will charge higher monthly fees and willhave fewer transaction-based fees. So that cardholder thatunderstand the fees and enjoy a low-cost card will be charged morein upfront fees that subsidize those cardholders that make a lot anumber of costly transactions. Indeed, by making costlytransactions free, despite the fact these transactions drive costsup, it may encourage cardholders to increase this behavior; whichwould in turn require the monthly fee be increased to cover actualcosts.

It is interesting that at the same time Senator Menendezwants to shield users from understanding costs associated withprepaid cards, he is promoting a bill (Clear Airfares Act) intendedto make airlines more clearly disclose the fees they charge toconsumers. Senator Menendez should take that same approach withprepaid cards and insist of fair disclosure and then leave it up tothe consumer to decide which program is best for their usagepattern.