NEW YORK–New analysis indicates that new federal rules related to overdraft fees are likely to drive more volume away from checking accounts and toward reloadable, prepaid cards. The reason: rules calling for greater disclosure will only highlight how much more expensive a checking account can be for consumers over prepaid cards, especially for low-income consumers.
"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," Gwenn Bezard, a research director at Aite Group told American Banker, a sister publication to Credit Union Journal.
"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, American Banker report 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.
But not all analysts agree. David Nelms, the CEO of Discover Financial Services, told American Banker, "I actually think that the bigger piece may be that people that can't qualify for credit cards anymore may have to use prepaid … since you can't charge as easily for risk anymore in the credit space."
