The reloadable prepaid card business has had a banner year, helped by the economy — and the industry's claim that, for a large swath of lower-income consumers, such cards can be cheaper than traditional bank accounts with overdraft protection.
But the costs that are said to make checking accounts the more expensive option for these consumers are not obvious to many of them. The federal rules on overdraft fees that go into effect July 1 could prompt banks to replace those costs with more visible ones — laying bare the cost differential with prepaid.
"It could put the checking account on par with the prepaid card. It's going to be more about competition from a marketing standpoint and a pricing standpoint: the two products will be more closely aligned in terms of how the pricing works," said Gwenn Bezard, a research director at Aite Group LLC. "I suspect that the checking account is going to become more expensive right off the bat" than it is now, as banks institute monthly fees or fees for bill payments and other types of transactions that are currently free.
The Federal Reserve Board's overdraft rules, released last month, will require banks to get customers' permission before enrolling them in such programs. The banking industry stands to lose at least part of the $25 billion to $38 billion Fed officials have estimated it makes annually from overdraft fees.
In the short term, the overdraft-regulation changes might have a downside for prepaid providers. In a much-cited February report, Bezard found that 9 million households pay more in overdraft and other checking-account fees than they would for prepaid cards, despite the high — and frequently assessed — fees those cards carry.
In this sense, overdraft fee regulation "may have a negative impact" on the prepaid industry by taking away some of the price advantage, Bezard said last week. But if banks move to compensate for the loss of overdraft fees, he said, "the checking account may be more expensive up front, instead of after the fact."
And though some companies still charge significant up-front, monthly and reload fees, the costs of prepaid cards have decreased significantly this year.
In February, Wal-Mart Stores Inc. cut the up-front, monthly, and reloading fees on its popular MoneyCard, in what was seen as a major step for the industry. Other large prepaid players, including Green Dot Corp. and nFinanSe Inc., followed suit over the summer.
Prepaid executives also professed themselves more excited than concerned about the impact of overdraft regulation on their industry.
"I have confidence that the retail banking industry will continue to not favor consumers in our demographic, people who make less than $50,000 a year," said Steve Streit, the founder and chief executive of Green Dot, which is one of the oldest and biggest prepaid marketers.
"Within that demographic, just because the law has changed doesn't mean that those consumers will be any more popular with banks. So the banks will need to find ways where they can structure their programs so they still can get similar fees, otherwise they can't be profitable — so I don't see that having a significant impact."
Even observers with slightly less of a stake in the prepaid industry's survival said that the fight to retain consumers in traditional accounts is one for banks to win or lose.
"It really primarily depends on what banks do with their new environment, and how effective they are in turning the overdraft regulations into a new opportunity. And so far they're mostly concerned with lost revenue," said Rachel Schneider, the innovation director for the Center for Financial Services Innovation, a nonprofit arm of Chicago's ShoreBank Corp.
