More millions of bank checking customers are turning to prepaid cards and PayPal for much of their spending. These are not the unbanked—people we can't serve profitably. No, these are checking customers, who have been generating profitable fees for banks.
They stop incurring overdrafts, they start putting their pay on prepaid debit—and soon, they won't need checking accounts. This then spreads to people with more income and less chaotic finances, as you fail to slash branch costs, struggle with increasing restrictions on overdraft fees—and make more people pay more for "checking."
Some banks have reacted by assigning vice presidents or even senior vice presidents of prepaid, who go to conferences and hire consultants. Sometimes one of them tells me she'll offer the bank's own me-too prepaid debit card in branches. Dismal, thoughtless, often a dead loss.
You can hold good customers and attract more by understanding what draws them to prepaid cards—then offer them greater value.
The message drawing people with checking accounts into prepaid is that they can avoid overdrafts and thus control their spending, incurring understandable and reasonable fees. A card that costs $5.95 per month plus transaction fees sounds reasonable compared to $10 or $15 per month for checking accounts, $35 overdrafts and more.
But prepaid debit winds up expensive too. You pay for face-to-face transactions for which banks don't charge fees. NetSpend even charges for automated telephone balance inquiries.
For his nickel-and-dime fees, the card buyer (!) actually gets very little. Grudging and limited access to electronic bill payment, which is now the dominant method of bill payment. (Maybe Walmart prefers having the bills paid through a teller at its Financial Centers. "Express fees start at $3.95.") No paper checks, even though credit cards have offered them for decades. And the customer has no opportunity to build credit—an important aspiration for most, if only because they want to make a lower apartment deposit or buy a used car with smaller down payment.
Here's what Green Dot says: "Because no credit is granted and no payments are required, this card does not build credit history"—it will not "build my credit rating."
Hardly a selling point. Maybe that's why Green Dot buries it amidst 74 other FAQ's.
The company's No. 1 headline benefit: you can buy the card with "no credit check." But the fact that you can obtain a card without passing a credit check needn't prevent you from using it to improve your credit. The opposite should be true.
The prepaid debit card has evolved into a degraded bank checking account at a no-name bank, providing a debit card, no checks and limited or no electronic bill payment. Plus of course FDIC insurance—which Green Dot, for one, sometimes discloses in a coy, subliminal way that could leave some doubt. The intriguing implication is that for $200 at risk, customers don't even care. (They shouldn't!)
That's all these cards do for customers, many of whom soon throw them away and may then try another, perhaps hoping it will cost less. A disposable product.