A new Pew study on consumer attitudes toward prepaid cards indicates two interesting trends: there’s a distinct credit aversion among prepaid users, and also a surprising amount of naiveté about how the cards work. These are both great news for the prepaid industry. This is exactly how prepaid card providers would like consumers to feel. However, it’s bad news for the banking industry: a bank- and credit-averse consumer, who is under-informed about the downsides to alternatives, will not soon hike down to their neighborhood PNC to take out an auto loan.
The Pew study consisted of four focus groups — two each in Chicago and Houston — that took place last November, at the height of the nationwide outrage over fees, and it showed. Fee aversion was key, according to the study, in converting users to prepaid cards. Interestingly, most participants in the study had checking accounts, but use prepaid in addition to help them control spending and avoid fees.
That makes sense, we suppose. The fees that participants cited as problematic were overdraft fees, which are usually about $30-$35. Since the Dodd-Frank Act passed Congress in 2010, overdraft has been an opt-in only program for checking customers. You can easily opt out of the coverage, which is essentially an incredibly expensive line of credit, and the fees that go along with it. For people who already have checking accounts, this more than negates the need for a prepaid card, especially if one’s reason for getting a prepaid card is to avoid fees — even the best prepaid card isn’t totally free.
This is a fascinating finding, and might be telling of banks’ attitude toward their poorer customers. One might reasonably expect that banks would be proud to announce that they no longer automatically sign checking customers up for overdraft. (To their credit, they make this clear to new customers.) But, because banks no longer charge these fees quite so frequently, they no longer really want low-net-worth account holders because they can no longer harvest $35 fees from them on a semiweekly basis. And so, it appears that there may be low consumer awareness about this regulatory change. And it doesn’t seem that banks have a problem with that. So, to prepaid they flock.
It shouldn’t come as a surprise that, if this is the calculation that banks are making, it is a short-sighted one that favors short-term gain over long-term growth. The revulsion and fear these prepaid customers evince when discussing banks and credit products do not suggest they will be buying many banking products in the near future. A recent Javelin Study suggested that prepaid cards might be an effective way of helping bring the underbanked and Gen Y into the banking system. Pew’s focus groups might suggest otherwise.
“When asked, many are uneasy with the idea of including credit options with prepaid cards,” writes Pew, “most express concern that it would undermine the perceived value of having a prepaid card — to budget and avoid overspending.” Also, only half of those Pew spoke with would want their prepaid cards to help rebuild credit, and “others strongly oppose it and have concerns about protecting their privacy.” That might be bad news for Suze Orman and her Approved Card.
Risk and revulsion
Furthermore, participants’ apparent distrust of banks and credit products has also led to a sort of naiveté about the prepaid industry. On this topic, Pew’s study has one of the longest subheds in whitepaper history, and it’s worth quoting in its entirety: “Most assume that the federal government provides oversight of prepaid cards. They are also unaware of consumer protection gaps — such as the lack of federal deposit insurance corporation (FDIC) insurance coverage on some cards and no requirements for fee disclosure — and are troubled upon learning of them.” Revulsion with banking fees has pushed consumers onto shakier ground, from a regulatory standpoint, where they feel more secure.
Mistrust of the banking industry might have turned a large chunk of the population off of banking products and credit for a long time, and it seems some of these people have placed their trust in themselves, and their ability to budget, and they use prepaid cards to do so. But they don’t use prepaid as a path to more traditional banking products; they use them to avoid banks entirely.
While boosters like to point to prepaid as a bright spot in the financial-services industry, and maybe it is simply for the fact that it’s empowering for those who have been booted from banking entirely, it’s hard not to see its dark underbelly: that this is a way of giving up entirely on the benefits of banking. Perhaps prepaid cards are nothing but a band-aid over the deeper wounds in the relationship between Americans and their banks.