Prepaid Cards Help Banks Replace Lost Debit, Credit Fee Revenue
Gus Artiles used to wait anxiously for the mail carrier on Friday afternoons, hoping his California state disability insurance check would arrive before his bank closed for the day.
Artiles, 54, doesn’t worry about the mail anymore. By Friday morning, Bank of America Corp. (BAC) automatically loads his funds onto a prepaid card, which Artiles uses to buy groceries and gas like a regular debit card.
“It’s a beautiful thing,” said Artiles, who lives in Los Angeles. “It’s more convenient, and you get your money a lot faster.”
Artiles is one of almost 2 million people taking part in “one of the largest prepaid programs on the planet,” said William M. Sheedy, the head of Visa Inc. (V)’s Americas group, referring to California’s effort to use prepaid cards for unemployment benefits, disability insurance and paid family leave programs.
Demand from states, the federal government as well as employers is helping power the prepaid card market, Bloomberg Businessweek reports in its May 30 issue. Consumers used prepaid cards in transactions totaling $65 billion last year, compared with $48 billion in 2009, according to the Nilson Report, an industry newsletter based in Carpinteria, California. That would have generated about $1 billion in transaction fees for card issuers, according to Sanjay Sakhrani, an analyst at investment bank Keefe, Bruyette & Woods Inc. Banks are looking for ways to replace the $25 billion in projected lost revenue that recent credit and debit-card reforms may cost them, according to Boston Consulting Group.
While the prepaid market includes cards sold directly to consumers in drugstores and other retail outlets, large banks see issuing cards for government benefits and employers’ payrolls as a growth opportunity. Using cards instead of cutting and mailing checks can trim costs by 75 percent, said Tim Wall, head of prepaid sales at New York-based Citigroup Inc. (C)
“We’re just at the beginning of many of our government clients moving from paper to a paperless environment,” said Margaret A. Scopelianos, a treasury services executive at Charlotte, North Carolina-based Bank of America Corp.
Banks collect two types of fees from prepaid and debit cards. They get money from the payment networks that charge retailers so-called swipe fees when consumers use the cards to make a purchase. While financial reform may cap such fees for debit-card transactions, Congress didn’t limit them for most prepaid cards. That exemption will be a “positive thing” for the prepaid market, said Citigroup’s Wall. Banks also may charge users for actions such as making multiple ATM withdrawals, using a non-network ATM, or overdrafts, just as they do with debit cards.
Negotiating Lower Fees
Because of the project’s scale, California was able to negotiate a program with almost no fees for consumers, something that was “paramount” after learning other states had less favorable deals, said Loree Levy, a spokeswoman for the California Employment Development Department. JPMorgan Chase & Co. (JPM)’s prepaid cards for Michigan’s unemployment insurance program charge $1.50 for each denied transaction, for example, and U.S. Bancorp’s cards in Ohio charge $17 for each overdraft.
The cards can help the estimated 60 million Americans who don’t regularly use bank accounts and instead depend on costlier check-cashing services and payday loans, consumer advocates have said. Fees can add up quickly for lower-income users. Earlier this month, the National Consumer Law Center graded all 40 states that use prepaid cards for unemployment compensation, and found 13 particularly “problematic” programs with high fees in states such as Connecticut, Colorado and Illinois.
Consumers Union, the National Consumer Law Center and the prepaid industry’s trade organization, the Electronic Payroll Coalition, recently issued a set of 10 “joint principles” for prepaid payroll card fees. The industry said increased consumer pressure, combined with more competition, means “fees are dropping and becoming more simplified in their structure,” says Brian Triplett, San Francisco-based Visa’s head of prepaid products.
The number of workers receiving prepaid payroll cards from their employers will double to 5.4 million by 2014, according to estimates by Aite Group, a market research firm. The federal government is embracing the approach. The Treasury Department conducted a pilot program this year to issue tax refunds on prepaid cards. Social Security recipients starting this month must choose between direct deposit or prepaid cards from Comerica Bank, and paper checks for new recipients will no longer be used.
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