The launch of the Chase Liquid prepaid debit card could either be highly significant — a paradigm shift for consumer banking! — or insignificant in the way all prepaid cards are ultimately insignificant. It’s impossible to tell right now. But we can say for sure that the product is at least noteworthy for two reasons. On the consumer end, it’s nearly indistinguishable from a basic checking account — except for the lack of a checkbook. And from the bank’s standpoint, it has two revenue streams: a $4.95 monthly fee and Durbin-exempt swipe fees.
Is the big bank prepaid card a win-win for consumers and banks post-Dodd-Frank? If so, why?
To understand the significance, let’s look at the evolution of the prepaid industry in broad strokes.
The reloadable prepaid industry first made itself known to the public as the silly and somewhat chintzy underbelly of the whole payments world. Branded by celebrities like Kim Kardashian and Kimora Lee Simmons, the cards were extortionate replacements for credit cards: instead of losing money to late fees and interest, customers just lost money to fees built into the cards’ contracts. Aside from looking bizarre, these cards were — plain and simple — a rip-off. In the meantime, established prepaid issuers were expanding their retail footprint. GreenDot even bought a bank. But these providers still charged high fees that made prepaid cards substantially more expensive than a checking account.
Though better than their celebrity-sponsored relatives, these prepaid cards were probably for people who wanted the convenience of a credit card without the risk of overspending. But in addition to having steep fees, they’re cumbersome to load and they have limited ATM networks. These could only really replace a checking account for a narrow sliver of the population. Still that population is growing: a recent study predicted that prepaid payment volume will see 22 percent growth in 2012, over 2011 volume.
Around the time the Durbin amendment to the Dodd-Frank act went into effect last fall, which capped debit card interchange (or “swipe fees”) and made free checking difficult for big banks to offer, the speed with which banks and other established financial service providers stepped into the prepaid market picked up. Regions Bank and American Express both launched prepaid cards in recent months, with competitive pricing (no monthly fee) in the case of American Express and the backing of a retail branch network, in Regions’ case.
And Chase, with its nationwide rollout of Liquid, has upped the ante a bit more: now there exists an affordable prepaid account with the full backing of a sophisticated nationwide retail bank, and most of the account features of a checking account. No more going to Walmart to buy a MoneyPak to load your card — you can do that at the ATM. No more paying for every ATM withdrawal — you have a massive nationwide network to use. Your account can be linked to direct deposit and you get all this for just $4.95 a month. You just don’t get checks (Chase charges $8 for cashier’s checks).
By contrast, Chase’s Total Checking account has a $12 monthly fee, which can be avoided by keeping a $1,500 minimum balance or making more than $500 in monthly direct deposits. For customers who don’t meet these minimums, a $12 fee can likely feel punitive: something that was formerly free punishes you for having less money than you did the month prior. Fee waivers work well when they work, but likely feel like being kicked when you’re down otherwise.
Compared to this, the Liquid Card’s fees appear incredibly straightforward: $4.95 a month for the privilege of using this debit card. Whereas a fee on checking is extortionate, because we became so accustomed to free checking, a fee for a prepaid card makes sense: it’s built into the experience.
Checks and balances
Jim Wells, President of Wellspring Consulting International, points out, in an email to MyBankTracker, that this has been clear for a long time. “As far back as February 2009, Aite Research published a report noting that at least 14% of existing checking account holders would be better off with prepaid cards. They would save money and incur fewer penalties.”
And as writing checks becomes a less and less popular mode of payment (electronic payments accounted for 80 percent of non-cash payments as of 2010; in 2001, checks were still the dominant form of non-cash payment), the risk of being penalized for not meeting monthly minimums might seem a bit excessive for someone who does not need to write any checks. Why not settle for the card?
On the bank’s end, the prepaid card has a built in monthly source of revenue, and a source of higher swipe fees: prepaid cards are exempt from Dodd-Frank’s cap on debit interchange fees. So, banks can charge pre-2011 fees to merchants for purchases made with prepaid cards, rather than the 21 cents they are limited to with traditional debit.
In a sense, it’s win-win, at least in a way that most checking accounts are not. It’s not hard to envision a banking landscape in the near future where entry-level checking accounts are slowly replaced by these prepaid accounts. After all, if your bills and rent can be paid electronically, the actual checking part of a checking account loses its appeal, especially if it’s an expensive service. And there’s hardly a difference at this point, anyway. Debit cards are the essential part of a checking account nowadays, likely used much more frequently than checks by most checking customers, so why shouldn’t a 21st century checking account reorient itself to this reality? It seems like it works better for both consumers and banks.
“The fact that big banks have waited until they saw an opportunity to escape the Durbin (Amendment) debit fee cap to deliver a simple, low-cost checking account substitute — that customers were already embracing — demonstrates the sorry state of bank marketing today,” said Wells. Perhaps that will soon change.