The Rise of Prepaid Cards

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prepaid cardsThe trend of pre-paid credit cards targeted toward African-American consumers seems to be on the rise and made all the more alluring through alignment with notable personalities to the demographic such as lifestyle mogul Russell Simmons and radio personality Tom Joyner.?Financial institutions seem to identify the Black segment as one of large opportunity due to recent statistics released by the Federal Deposit Insurance Corporation which states that 25% of all U.S. households are unbanked or underbanked. Of the households surveyed, 7.7 percent were unbanked, which translates nationally to 9 million households – approximately 17 million adults. An additional 17.9 percent ? or 21 million households nationally (approximately 43 million adults) – were found to be underbanked. The proportion of U.S. households that are unbanked varies considerably across racial and ethnic groups with certain racial and ethnic groups being more likely to be unbanked than the population as a whole. Minorities more likely to be unbanked include blacks (21.7 percent of black households), Hispanics (19.3 percent), and American Indian/Alaskans (15.6 percent). Racial groups less likely to be unbanked are Asians (3.5 percent) and whites (3.3 percent). Certain racial and ethnic minorities are more likely to be underbanked than the population as a whole. Minorities more likely to be underbanked include blacks (an estimated 31.6 percent), American Indian/Alaskans (28.9 percent), and Hispanics (24.0 percent). Asians and whites are less likely to be underbanked (7.2 percent and 14.9 percent, respectively).?Thus, the pre-paid credit cards are meant to be a means to an end for more fluid financial transactions by those who are seemingly caught within a system.?

?Apparently, the reality is that some people just cannot qualify for checking accounts because they have bad credit or have bounced lots of checks so they are placed in ChexSystems, a database that banks use to restrict access to accounts to people who’ve bounced numerous checks, etc. Prepaid cards are a low cost, safe, convenient alternative for people without (or limited) access to checking accounts to participate in our increasingly card-based economy. According to the Center for Financial Services Innovation (CFSI) 2009 study, Consumers’ Views on Prepaid Cards,?consumers reported liking the cards because of their convenience, accessibility (can be used anywhere the brands are accepted), immediacy of funds, simplicity and transparency, value (compared to checking account or check casher) and built-in discipline (can’t overdraw funds.)

?However, whereas free-checking is standard of today’s banking system, there are fees associated with the pre-paid method. For example, Tom Joyner’s REACH card is $9.95 and requires a purchase or activation fee; an $8.95 monthly fee and a $2.50 ATM fee which can be avoided by getting cash back with purchases using your pin number at the point of sale. After the activation fee, there are only two recurring fees: monthly and ATM fees. If one used the card for a year and only received cash back with purchase, the cardholder would pay $107.40. For the average user, the card should run about $120 a year.?

?The manner in which these pre-paid cards and the personalities which support them can vary, but Joyner’s particular business venture is the result of a business arrangement between Reach Media (owned by Tom Joyner) and PreCash Corporation, a privately held company whose transactions total more than $1.6 billion.?In fact in 2008, the company reached a milestone of placing approximately 30,000 cards monthly.?? However, some believe that such business models and the Black notables who support them might benefit from further examination. “There are definitely some personalities who just see this as another way to cash in, no different from doing a soap commercial.?Just as most personalities probably don’t understand or use the product they are pushing, I suspect it?s the same with pre-paid cards.?While I’ve never quite understood the desire to pay a lot more for something simply because someone famous you like pushes the product, I also accept that some consumers value that,” explains Mark Calabria, director of financial regulation studies at the CATO Institute, a public policy research organization. Regarding the pre-paid structure itself and the fees surrounding it, however, Calabria adds, “In terms of fees, the market for pre-paid looks fairly competitive to me, which suggests that fees are unlikely to be too out of line with reasonable costs.?As there are also plenty of options to pre-paid cards, such as debit or credit cards, that competition is likely to keep fees from getting out of balance with costs. My general approach is to encourage as much consumer choice as possible, so I’m definitely against restricting consumer choices – either directly or indirectly – via regulatory caps on fees.?

“The unbanked question is a hard one.?Lots of folks, particularly the FDIC, have spent a lot of time researching it.?On one hand, it seems a lot of consumers find banks to be unfriendly, sometimes because of the hours, sometimes they don’t feel respected at the banks, etc.?To the extent that consumers feel that the service is better at non-banks, then unless banks change that, lots of people will remain unbanked,” explains Calabria.

?Deborah C. Wright, president and CEO of Carver Bancorp, the largest publicly-traded African-American operated bank, has other sentiments on reasons behind Blacks and underbanking. “The banking industry has not invested in products and services needed by this population, leaving an opening for others in the broader financial marketplace. The void is filled by institutions that meet the short term needs of residents, namely access to cash versus savings and financial education,” said Ms. Wright.?”In New York City this percentage almost doubles to 13%. So our industry has a lot of work to do to encourage these individuals to come under our tent. The key to integrating the unbanked into the financial mainstream is financial education. “For those who have, for whatever reasons, fallen outside of traditional banking and chosen pre-paid cards, Ms. Wright has mixed observations.??Some of the products that have been created outside the banking sector have been innovative, but have pricing or features that are not well understood by customers. Prepaid cards are a good example. They serve important goals, namely reducing the need to carry cash, ability to receive recurring cash transfers from work or public agencies, ability to pay bills efficiently, etc. But the fine print is very important and many of our people have been hurt by the high fees of certain products. So it?s important, as with any product, to read the instructions well and understand the risks and costs.” That having been said, Carver is even planning to launch its own pre-paid card service but with a deeper offering. “Carver is launching a product line for the unbanked this year, that I hope will be a game changer for residents of our community,” explains Ms. Wright.?”It will feature: re-loadable prepaid cards, check-cashing, money transfer, bill payment, low cost money orders and ‘second chance’ checking accounts for those want to re-enter the banking relationship. Importantly, they and others in our community will be invited to participate in financial learning sessions throughout the year within our branches or in conjunction with our community partners.”

?It would seem that the economic crisis is giving way to both innovative, restoration and education for those in the Black segment who are interested.?Since many have resolved to get their financial houses in order for the new year, it only makes sense to evaluate all the options available and select the best choice for the situation with an eye toward building as great a financial stability for the future as possible, with as few outside hands in one’s pocket as possible.

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