More and more banks are marketing prepaid cards in a push to woo low-balance customers who have revolted against overdraft fees.
Their motive is straightforward. Banks that sell prepaid cards can collect a steady stream of small charges including higher swipe fees, in some cases to help compensate for some of those lost $30 overdraft fees.
But now industry giant Bank of America (BAC) is bucking the trend. Its check-less checking account, which features a reliable monthly fee of $4.95, will likely be less lucrative than prepaid products being offered by some of B of A's competitors.
Bank of America's strategy, which is winning praise from consumer advocates, is to build more durable relationships with younger customers in the hope that they'll eventually generate bigger profits.
"Critics might argue that they're leaving money on the table," says Robert Hedges, managing director at the consulting firm AlixPartners. "This is clearly taking a long-term view regarding, how do we grow a customer base, and welcome a customer base, where they can have a predictable banking relationship with us, as opposed to worrying about fees?"
The B of A offering, known as the SafeBalance account, is now available in Oregon, Rhode Island, Michigan, Maryland, Virginia and the District of Columbia. The Charlotte, N.C., bank expects to introduce the product in other markets later this year.
Because the account doesn't come with paper checks, it may appeal most to younger customers who are comfortable making digital transactions.
"I think for the consumer raised on plastic, swiping and digital payments, this is going to be part of the norm," says Mark Schwannhauser, director of omnichannel financial services at Javelin Strategy & Research. "They resort to the check only if there's no other option."
And there's another reason why the new Bank of America account is likely to appeal to younger consumers, Hedges says. "A lot of the overdrafting occurs with consumers under the age of 30."
It's not just people who spend more than they have in their bank accounts who stand to benefit. Bank of America customers with other types of checking accounts must pay a monthly maintenance fee of at least $12 if they maintain a balance of less than $1,500. The new account has no minimum balance requirement.
Bank of America doesn't offer a prepaid card for consumers, but many of its biggest competitors, including Wells Fargo (WFC), U.S. Bancorp (USB), and JPMorgan Chase (JPM) do.
For large banks that are subject to the price cap on debit card interchange fees, prepaid cards offer a tempting proposition. Depending on how they're structured, prepaid cards may be exempt from the cap on swipe fees, which can mean a substantial boost in revenue for the bank.
From the consumer's standpoint, prepaid cards frequently don't include all of the features that checking accounts do, including online bill pay, and they often impose a wide variety of fees. The new B of A account offers bill pay while charging a single, relatively low monthly fee.
"We think it offers a very much more enhanced value proposition versus a prepaid card," says Titi Cole, retail products executive at Bank of America. "When we went to our customers and we talked to them about this product versus prepaid, they were very clear that for them, having that full access, and being part of the mainstream system, was really important."
It's clear that the checkless checking account will be attractive to certain consumers. But the question other banks will be asking is: how profitable will it be for Bank of America? After all, the product is subject to the large-bank price cap on swipe fees.
Bank of America's success will hinge on its ability, over time, to sell additional products to customers who enroll in checkless checking, says Ben Jackson, a senior analyst at Mercator Advisory Group. Those products could include a savings account, a credit card and eventually a mortgage.
"One of the things that bankers know is that the financial life of a person is not steady-state," Jackson says. "It changes over time. And so having the ability to plug into people's different financial needs at different times in their life can be very, very profitable."