A company that offers asset-protection devices to auto lenders has introduced a linked prepaid card that could encourage the unbanked to make their car payments on time and also prompt them to make other purchases electronically.
Sekurus Inc. has marketed the On Time "starter interrupt" system to subprime lenders for nine years. The device is locked to a car's steering wheel and prevents the car from starting when a loan payment is past due.
Michael P. Simon, Sekurus' president and chief executive, said the On Time prepaid Visa Inc. debit card, which was introduced last week, takes that idea further, linking the payment device to the On Time device.
Monthly car payments are to be automatically deducted from the balance on the borrower's card. If there are insufficient funds, the device will freeze the vehicle's starter; once customers add funds to the prepaid balance, they will automatically get a text message delivered to their mobile phones with a code to unlock the On Time device.
Mr. Simon said the Murrieta, Calif., company started evaluating various prepaid card strategies after learning that many of its dealer clients' customers are unbanked. "With so many people not having bank accounts, we wanted to make it easy" for them to pay their auto loans on time, he said.
The prepaid debit card will help customers "get the money to the finance company and help their cars get on the road," Mr. Simon said.
More than 300,000 On Time devices are in use nationwide, he said, protecting about $3 billion worth of assets, and Mr. Simon said he expects there will about 500,000 of the linked, On Time debit cards in use within 18 months.
Some customers could also start using the cards to make everyday purchases, he predicted, as well as for managing their monthly car payments.
The cards and the system for delivering the unlock codes were developed by Sekurus and Debit Card Ltd., a Richardson, Tex., payment processor. Sekurus has been testing them for more than a year. They are issued by Palm Desert National Bank and can be used at any merchant that accepts Visa cards.
Nik Thomas, the stored-value consultant for Sekurus and the former chief executive of Debit Card Ltd., said the company is encouraging customers to have their paychecks deposited directly into the card accounts.
Cardholders must pay fees of $4.95 per month for the cards and $1.95 to withdraw money at an automated teller machine (plus any other fee imposed by the ATM operator).
The cards can be reloaded at Western Union Co. or ACE Cash Express Inc. stores, for $3 to $4. There is no fee for direct deposit or for making purchases at the point of sale.
Mr. Simon said that at least two auto lenders are offering to waive these fees to encourage people to use the cards, in part because the cards relieve the lenders of the burden of managing the On Time devices.
When delinquent customers refill their cards, it is Debit Card Ltd. that acknowledges the payment and issues the unlock code. (Sekurus has a patent pending for this system of electronically delivering a code in response to a debit card transaction.)
Mr. Thomas said "the biggest challenge" for dealers using starter-interrupt systems like On Time is distributing unlock codes to delinquent customers. Encouraging customers to use the linked debit card lets a "dealership … sell a consumer a car anywhere and collect his payment efficiently and cut his cost of doing business," he said.
Lenders can also minimize security concerns and costs by offering the linked debit cards as an alternative to cash payments for auto loans. He said that some lenders can "take in six figures a day, especially on paydays," he said.
The reception from both dealers and consumers had been positive, Mr. Thomas said. "Once the dealer understands we can take the code management out of his hands, he is very receptive," he said. "Once the customer understands the fee structure, he opts in 90% of the time."
The "subprime automotive financial space is the last opportunity for a company to really make an impact" in the stored-value card business, he said.
"We're first targeting the unbanked, then the underbanked, then any customer who has a device in his car."
Amy Dunker, the president of Debit Card Ltd., said that linking car loans and debit cards for unbanked consumers is a logical step.
In the subprime automotive industry, people "in that category where they're able to make their payments but just can't manage their payments," may be helped by the technology to "push that payment to the top" of their priorities and keep the use of their cars, she said.
Connecting the device to the card can also motivate people to make timely payments and help them establish credit, Ms. Dunker said.
"Today there's so many things you can't do without having some type of electronic" payment option, she said. "A lot of lien holders might use this to soft-sell the unit because you're getting a Visa card" along with the On Time device.
Adil Moussa, an analyst at the Boston research firm Aite Group LLC, called the linked card "an effective marketing strategy" for On Time. "It's a clever way to promote the prepaid product," he said. "This is a very natural way of doing business."
Bruce Cundiff, a research analyst at Javelin Strategy and Research in Pleasanton, Calif., said the packaging of the starter-interrupt device with a linked debit card could be "a combination of carrot and stick in terms of pure incentives" for the underbanked.
Bringing "subprime consumers into the realm of a more sophisticated account … could lead to better financial management" by them, he said. And on the other side, "it might make lenders more willing to offer loans to more people."
