Can those celebrity-linked prepaid cards really help the unbanked?
Lately there have been a spate of them, from Kim Kardashian's to Lil Wayne's. When it comes to that newest one, the Approved Prepaid MasterCard issued by the Bancorp Bank and endorsed by personal finance personality Suze Orman, who is also an investor in the product, less is not necessarily more. There are better alternatives.
First, a disclosure. I knew Orman well before she became brand-name famous (we're both from Chicago) and she even wrote a blurb for my book, "Late-Start Investor," in 1998. She's generally done some good things for financial consumers.
Yet there's something troubling about an avowed consumer advocate who plugs a product that charges $3 "maintenance" fees (the first month's fee is waived) and even restricts deposits.
There are countless other products that don't charge monthly fees and provide incentives for you to open accounts (bankrate.com). I use several myself. Check out your local credit union or community bank. Some institutions also offer "second chance" accounts for those who have regularly bounced checks.
Greg McBride, senior financial analyst with Bankrate, says, "the majority of consumers would be better off with a traditional banking relationship instead of a prepaid card. Some 75 percent of consumers never overdraw their accounts." He notes that one reason banks favor these products is that they're exempt from the Durbin Amendment, which limited "swipe fees."
Pre-paid cards can charge twice the transaction fees of regular debit cards and are geared toward the 25 percent of U.S. households that are unbanked. So they represent a profitable new market for financial services companies, McBride has found.
Still, the restrictions on the Approved card are odd when compared to plain-vanilla banking products. For Orman's Approved Card, you must use direct deposit and they won't allow you to deposit personal, cashier's checks or money orders to load your account. So it's conceivable that someone who's unbanked would have to pay an onerous check-cashing fee to a third party if they're not doing direct deposit with a paycheck.
There's more. You get one free monthly call to their customer service department and thereafter it's $2 per call. Want a paper statement? It's $2. This is all in the fine print of the card's cardholder agreement (here).
You can only spend $2,000 on this card in a 24-hour period. As long as you have enough money on deposit, why the limits? And you can't use it at gas pumps or for making hotel or car reservations. If you haven't made a direct deposit, you'll be charged for a balance inquiry. Why can't you check this online for free as many banks offer?
If Orman "hates extra fees," as she says in the advertising, then why promote a card that's loaded with them? I can understand how the fees work as economic levers to keep account expenses down, but these fees often generate profit for the bank at the expense of the consumer. Far too many people don't read the fine print and pay dearly. (Another personal disclosure: I once had a health savings account with Bancorp and they charged me a $2.50 monthly service fee, which I abhorred. I stop using that account years ago.)
Worse yet, Orman's card will work with the credit reporting agency Transunion, which will provide access to their Transunion credit score, analysis and regular updates for free to users, but which will also collect information about them. While it's useful to have access to credit information on a regular basis, this is no substitute for a FICO score, which most lenders use to evaluate your credit-worthiness. Keep in mind this is not a conventional credit card that can be employed to qualify for more credit.
Orman has said her participation in this card is part of a two-year experiment to help the unbanked eventually get credit, but it's unclear how the information that Transunion is collecting will be used.
"People without banks may have irregular income or live paycheck to paycheck," says Lauren Saunders, managing attorney with the National Consumer Law Center, who has talked with Orman about the product. "Small, late payments may go into credit reports, so it's not clear if this will build or hurt credit."
Although she says that the Approved card is a "relatively good product for the unbanked," Saunders notes "a full-featured bank account is a better option for most people."
Adds Liz Pulliam Weston, a consumer credit expert and author of "Your Credit Score" (asklizweston.com/): "It's not that hard to find free or at least low-cost checking at a credit union. I'm also concerned because people may get the idea that using this card will improve their credit. It won't." (In fact, we recently listed 10, which you can see here: link.reuters.com/wep95s)
John Barbella, senior vice president for Bancorp, says the information wouldn't be shared with credit bureaus and may help users "build a bridge" to apply for credit at a later date. He says while the bank has no plans to reduce fees or directly link to a savings account now, it may make changes later. Many of the restrictions on deposits and withdrawals, he noted, are to deter fraud.
"The program is extremely competitive if not beating the market" for similar cards, Barbella adds. The Bancorp fee structure compares favorably with other prepaid cards such as Wal-Mart's, although the retailer allows you to waive the monthly fee with a minimum $1,000 deposit.
I know Orman has done myriad things to help consumers and her advice is usually pretty sound, but why not promote a free checking account linked to a savings vehicle for the unbanked? She's always been a strong advocate for financial disclosure, so why isn't she saying how much she stands to gain from this product's success? She didn't respond to my request for comment and Bancorp's Barbella wouldn't disclose her specific financial arrangement.
Orman's card doesn't promote savings first over transactions, which is a show-stopper for me. It's a flawed product paved with good intentions that doesn't do the right thing for the most vulnerable financial consumers.
The author is a Reuters columnist. The opinions expressed are his own.
(Editing by Linda Stern and Beth Pinsker Gladstone)