How do today's most recently introduced prepaid cards differ from checking accounts?
The convergence has been rapid. I believe the biggest remaining difference is the name!
This evolution wasn't obvious when prepaid cards debuted, but it's past time to reckon with it.
Prepaid cards are expanding not just in number, but in features, incorporating all forms of payment—even paper checks. Meanwhile, checking accounts are contracting, not just in number of checks written, but even as to available means of payment. (There are now "checking accounts" that don't allow writing of paper checks!)
If features and costs were equal, many consumers would still have a strong preference for a product bearing one or the other of these two labels. Some, for instance, would prefer "prepaid card" because they think they'd have to apply and wait for a "checking account," or because they fear incurring overdrafts—to which virtually all "checking accounts" now expose them.
So, offer both labels, at least for now. More important, treat the prepaid card as a deposit product and manage it together with checking accounts, rather than with card products. This is the best way to avoid not only cannibalization, but inefficiency, forgone cross-sell, and illegal discrimination against protected classes of customers.
Which features should be included with either product?
It would be strange if anyone devoted to cross-sell and to building relationships wanted to avoid making available with each of them every relevant capability for which significant numbers of customers are willing to pay adequately.
As to paper checks, they were offered profitably even with credit cards. They should likewise be available with any asset transaction account, at appropriate prices. Bill-pay already will print and mail unlimited checks, but this is far slower and can actually be more expensive than letting the customer write the check.
Unlike properly executed bill pay, the paper check could cause an overdraft, since it isn't subject to immediate authorization. And there is fanatical consumerist opposition to allowing any overdrafts on an account that bears the "prepaid card" label. Nonetheless, the opt-in required for debit card and ATM overdrafts on checking accounts can and should be expanded to paper checks, including on "prepaid card" accounts—as well as to individual bill pay transactions. This is the most customer-friendly structure. The customer could also be permitted (or even required) to enter his paper checks by number and amount on his mobile device or PC, to make sure funds are available and place a hold on the money.
Suppose that instead of this, you allow overdrafts on your "checking accounts," but not on your functionally identical "prepaid cards." You then proceed to market the "prepaid card" in low-income, low-asset areas—and the "checking account" elsewhere. In that case you are discriminating against protected groups by selectively marketing overdraft credit to others but not to them.
Many "prepaid cards," unlike "checking accounts," do not permit deposit ("loading" in prepaid parlance) by check. That's unreasonable. Some banks that don't allow such loading nonetheless permit noncustomers to cash checks, even personal checks, in their branches—for a fee such as 1% that is typically less than a nonbank check casher would charge. If anyone with proven identity can cash a check—for a price, and subject to approval—then why shouldn't he be permitted to deposit that same check to a prepaid account by remote deposit capture, with immediate availability?
Every option that brings value to the account relationship should have its price. Just as we are beginning to charge for paper (rather than electronic) statements, we can charge for paper check (versus electronic) deposit or bill pay—at least for customers who don't have another relationship with the bank which includes free use of checks.
With these bridges crossed, even the last one is not too far. Many customers believe that banks will turn them down for checking accounts because of their past problems. "Checking accounts," like "prepaid cards," should be available instantly to all comers—no need to apply. Know-Your-Customer is enough. Put holds on high-risk check deposits. Don't allow high-risk customers to incur substantial overdrafts. Available databases support reliable instant decisioning in both these situations
Optimally, customers seeking either product label will have a choice of pricing plans. Many customers will prefer to pay just for what they use, while others will prefer a fixed monthly fee. Same as for today's cell phones, checking accounts or prepaid cards.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was for six years the founding CEO of First Deposit, later known as Providian.