Prepaid card companies have had great success at attracting the underbanked, but their prices remain high compared to banks' — and they might have no choice but to keep them high.
The reason is that most prepaid card companies are marketers which, unlike banks, do not own the technology needed to produce their product cheaply. Prepaid companies must outsource virtually every aspect of their business, from card distribution to card production and customer service.
Green Dot Corp., whose monthly fee is double what some rivals charge but not exorbitant, is aiming to slash costs by slashing its outsourcing. Green Dot estimates that its $15.7 million purchase of Bonneville Bancorp and its $2.5 million purchase of some assets of eCommLink will save it a third of its card-issuing and processing expenses.
While Green Dot will be able to compete more cheaply, severing contracts with companies like Total System Services Inc., these buys may not be enough to close the gap with American Express Co., which has the technology and diversity to sustain a prepaid card with almost no fees.
"Of course lowering costs will allow [Green Dot] to lower their fees, but it's hard to imagine they will be able to lower marginal costs enough to offset a reduction of monthly maintenance fees … to zero in order to match American Express' pricing," says Thomas C. McCrohan, managing director for equity research at Janney Montgomery Scott in Philadelphia.
Finance guru Suze Orman might agree with that. Her prepaid card, which launched this month, has come under fire for fees that some say contradict Orman's usual message of saving money.
"If I could, trust me, I would give it to you for free," Orman says in a video on the website that sells the prepaid card. "But there's the cost of the plastic [and] all the technology behind it. It is expensive."
And from Orman's perspective, what Amex is doing — charging only for ATM use — is impossible.
"There is no way Amex has just one fee," Orman said in an interview with the radio program "Marketplace Money."
Amex's pricing is indeed possible, in part because the New York financial services company owns the technology that supports the product.
Though Amex declined to disclose its specific costs, "many factors play a role" in its pricing, Vanessa C. McCutchen, an Amex spokeswoman, said by email. "We facilitate the end-to-end customer experience, so that provides efficiencies that uniquely [position] American Express to provide a best-in-class prepaid card with no monthly or activation fees."
After Green Dot's two-year transition to in-house processing, it may be able to make the same boast.
"Green Dot has aggressively lowered [its] fees wherever possible," says Tim Sloane, the director of the prepaid advisory service at Mercator Advisory Group in Maynard, Mass. "They have introduced, over time, several new programs that significantly reduce the cost to their card holders."
Green Dot Chief Executive Steve Streit did not respond to a request to be interviewed for this story.
Today, Green Dot customers typically pay $5 for a card and a $5.95 monthly fee that is waived if the user loads $1,000 or makes 30 purchases a month. There is no reload charge for customers that use direct deposit. There is a $4.95 charge to load cash to a Green Dot card at a retailer.
Green Dot's next move is likely to be closely watched by other prepaid competitors as they adjust prices.
For example, Russell Simmons, the music mogul who founded the prepaid card marketer UniRush LLC, said Tuesday on his Twitter account that his company plans to lower its fees in the near future.
NetSpend Corp., by contrast, is expanding its distribution, most recently through a deal announced Wednesday with 7-Eleven.
Despite the pressure on prices in the prepaid industry, Green Dot has the option to break from the pack and simply pocket its eventual cost savings from its acquisitions, says Zilvinas Bareisis, a senior analyst at Celent. "The level of fees is a commercial decision, and lowering or increasing them impacts the margin," he says.
Corrected January 26, 2012 at 9:16AM: An earlier version of this story gave an incorrect figure for the price Green Dot paid to buy Bonneville.