BANKTHINK

The Problem with Prepaid — Suze Orman Edition

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There's been a pretty strong backlash against personal-finance guru Suze Orman for daring to attach her name to a prepaid card, even though the card's monthly fees are more in line with the low-end one offered by Wal-Mart than the VIP-only Kardashian Kard.

Shortly after Orman's card was introduced Monday, she was accused of compromising her credibility by endorsing an exploitative product. Orman lashed out at her critics, even calling one an "idiot" on her Twitter feed, for which she has apologized.

But perhaps the problem here is not one of attitude, nor of a respected authority abusing her influence. Perhaps the real issue is that to those of us with bank accounts, prepaid cards will never make sense.

Orman's prepaid card, like nearly all prepaid cards, carries fees. As bank customers, we're not used to seeing fees displayed and charged so prominently. We get all our fees waived by meeting a minimum balance and using direct deposit and online bill pay. We have no idea what our monthly fee even is. And if we ever get an unexpected fee, we pick up the phone to get it reversed.

Because we are so committed to this method of handling our money, these fee-laden prepaid cards look like a bad deal. Having such visible fees, even if they're low, is an alien concept. It's like wearing your underwear on the outside. It just isn't done.

And from this perspective, we never understand how an underbanked person views prepaid cards. In their eyes, these cards look great. They even look honest.

No story illustrates this better than a 2009 NPR piece about a man named Al Walker who uses an expensive check-cashing store even though he has a bank account. The reporter even showed Walker, fee by fee, how he would save $5 per check just by depositing them in the bank account he already had — but Walker refused to use the bank.

"I don't have to worry about an overdraft fee here" at the check-cashing store, he told NPR. "I don't have to worry about overdraft protection. I don't have to worry about whether this is free. I know what I'm paying; it's the same every time I come here — and maybe that's something banks should look into."

The audience for Orman's card, or for any prepaid card, doesn't care that it's more expensive than a bank account. The cards earn users' trust by being open about their fees instead of surprising them with overdraft charges.

Perhaps this is why someone like Russell Simmons, the music mogul behind the RushCard, can get on his Twitter account to voice his support for the Occupy Wall Street movement and, the same day, tell that audience that he charges them each $120 a year just to own his card.

To his audience, that's not predatory. That's honesty. And as Walker said, maybe that's something banks should look into.

Daniel Wolfe is an editor for risk management and technology at American Banker. 

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Comments (4)
It's true that there might just be a parting of ways when it comes to how different consumer segments are going to view these products. But I wonder if the concept is really so alien to the banked as wearing underwear on the outside.

One consumer example that comes to mind, albeit a goofy one, is 100 calorie snack packs. Now, stay with me on this -- it's been well documented that those snack packs cost significantly more per ounce than the big bag of chips with 10 servings in it. (Not to mention the 100 calorie bags fill landfills much more quickly).

Even if rationally the snack packs are a bad deal, consumers willingly pay for the external control the 100 calorie bags provide. You don't have to think about counting out every chip - you just eat the bag and you're done. It might be that people know the chips cost more that way, but they are willing to pay the premium not to have to have wrestle with themselves over whether each chip should be the last.

This is just speculation but in the case of prepaid cards, I wonder if at least for some there's a similar effect: you're paying a premium to have an external source cut you off. When the money's gone, the money's gone - unlike, say, with a credit card, which is much more like the 10 serving size bag of chips.

The NPR story you cite speaks to that in some ways -- Walker is willing to pay a premium for his peace of mind, "rational" or not. Crazy? Or crazy like a fox?

And an ancient example: Odysseus tying himself to the mast of the ship when the sirens are near. A costly imposition, but perhaps worth the price.

Now, with banks and nonbanks should be able to make an unregulated killing off of these very human tendencies is a different story altogether...-Victoria Finkle, Reporter, American Banker
Posted by vfinkle | Friday, January 13 2012 at 1:44PM ET
Consumers are willing to pay for transparency and an absolute knowledge of cost, even if it means paying a little more. Victoria's bag of chips analogy goes far, but I think it misses an important point. Underbanked consumers, based on their experience, assume that banks will charge them predatory fees. And, this is probably an accurate assumption, based on every interaction that they or a friend has had. Spending $120 a year for transparency is a great deal compared to $399.50 in expected overdraft fees.

It can be really hard to understand someone who makes decisions based on a very different set of assumptions. Daniel makes a great point that few readers of American Banker probably get the value of prepaid cards to the underbanked. An article from 2010 that is still relevant to this discussion is Transparency: What are Banks Missing? I think it follows the behavior theme a little further.

Finally, Suze Orman is all about gaining control of your finances. For many consumers, a prepaid card is a powerful tool to do just that.
Posted by Eric Lindeen | Monday, January 16 2012 at 10:20AM ET
"We get all our fees waived by meeting a minimum balance and using direct deposit and online bill pay." Oh really? Who are we? Seems to me I recall reading in the Banker recently that 54% of consumers now pay a fee for their checking account (up from 46%) and it averages over $4/month. All of the sudden that $3/month fee from Wal-Mart and others for a prepaid debit card doesn't look so bad does it? And help me understand why "it just isn't done" is a reason not to do something. If this were the case there would no such thing as innovation. Ever.
Posted by JIm s | Monday, January 16 2012 at 11:55AM ET
This all reminds me somewhat of what Elizabeth Warren had attempted to do before proposing the agency that became the CFPB. She tried partnering with companies to participate in an independent rating service for the transparency of credit card fee structures. Banks ultimately backed out of the plan. But the idea was that if approved, a card would get an equivalent of the "Good Housekeeping seal of approval."
Posted by jadler | Thursday, January 19 2012 at 1:11PM ET
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