Banks could lose up to $20 billion of annual revenue if a large group of checking account holders shift their money to prepaid debit cards, a report published Wednesday said.
At least 14% of U.S. checking account customers would save money if they made such a switch, according to the report by Aite Group LLC. Generally, the fees associated with prepaid cards are much higher than those on checking accounts. But the customers in question — most of whom have low incomes — paid 4% or more of the money they deposited last year in fees for things like overdrafts, Aite said. For these roughly 9 million households, the fees on prepaid cards would compare favorably, the Boston market research firm said.
"If consumers become more comfortable with prepaid debit cards, loading more money on their cards, banks will find themselves losing more customers," Gwenn Bezard, a research director at Aite and the report's author, said in an interview. "So it's better for banks to start planning now what's going to be their alternate game plan instead of crossing their fingers and hoping that alternative providers are not" going to win away customers.
Such a game plan would include rethinking the traditional emphasis on checking accounts, he said.
Financial institutions seeking to acquire underbanked customers — those with few or no traditional banking relationships — have largely tried to do so by selling them traditional checking accounts. Even banks that offer nontraditional services such as money transfers generally do so to get people to open more traditional accounts.
Mr. Bezard said community banks have been the most active in trying to develop prepaid cards that are marketed as an alternative, rather than a supplement, to traditional checking accounts. The larger banks, with the most checking accounts, also collect the most "nonsufficient funds," or overdraft, fees. "The ones that are NSF addicts, if you will, are really the large banks," he said. "Community banks are not as engaged in trying to maximize NSF revenues."
Jennifer Tescher, the director of the Center for Financial Services Innovation, a nonprofit affiliate of ShoreBank Corp., said that, "for banks, it's all about the checking account." But she sounded more optimistic than Mr. Bezard about the likelihood of larger banks' developing their own directly marketed prepaid products rather than ones they issue for third-party prepaid marketers.
"Prepaid should absolutely have a place in the broader account fleet that banks offer, as a legitimate product in its own right," she said. "Prepaid cards, those that are well-priced and well-structured with good consumer protections, are increasingly enabling consumers to work their way toward financial prosperity, as they would with a checking account."
She and Mr. Bezard said few banks offer prepaid debit cards as independent products without going through a third-party marketing partner and that it is generally smaller banks that offer them as independent products.
But Ms. Tescher said she knows of two large banks that are running pilot tests of prepaid debit cards offered directly, though she could not disclose their names.
"What I'm recommending is that banks not only issue the card but proactively offer the card as a lobby product," she said. If the two large banks bring their debit cards out of pilot testing to a wider audience, "they could make a real difference and could light the way," she said.
In his report Mr. Bezard argued that more consumers might switch entirely from checking accounts to prepaid debit cards as they become more comfortable with loading greater amounts on the cards — which would make using them more cost-effective because the fees would not rise with higher deposit amounts.
Right now, "the mean annual load amount on a prepaid debit card is about $3,500, compared with a mean of $49,400 for checking accounts," Mr. Bezard wrote.
Another Aite report, published last week, said that 30% of the 400 people in a survey already had a prepaid debit card. "I was really surprised to see how many of the people we talked to actually have a prepaid debit card," Mr. Bezard said. "Clearly, the level of comfort is increasing."
The report published Wednesday is based on three sets of data: bank statements from 1,915 checking account holders from November 2007 to October 2008, compiled by Lightspeed Online Research Inc.; account data from 8,140 prepaid debit card account holders over the same period, compiled by an undisclosed major prepaid card provider; and a November 2008 Federal Deposit Insurance Corp. analysis of bank overdraft practices.
Industry members reacted to the report's findings with some skepticism. "We've always said that checking accounts aren't for everyone. They do require attention and management," said Nessa Feddis, a senior federal counsel at the American Bankers Association. But "it's hard to argue that free checking accounts aren't beneficial to the customers."
She pointed out that prepaid cards have their own inconveniences and indirect costs, even if they cannot be overdrawn as a checking account can. "A prepaid card means that transactions will be denied if there are insufficient funds. If a card's being used for important payments, like a mortgage or utilities, they may have the inconvenience of returning payments and then any additional fees charged" by the payee.
James P. Maloney, the chairman of the $79 million-asset Mitchell Bank in Milwaukee, said it has had a hard time selling a prepaid card.
"Our card is very cheap" — $3 to buy and $3 to reload — but "we have very little uptick on our card," he said. "We offer it, and nobody's knocking down our door."
Mitchell has not "given up" on prepaid debit, Mr. Maloney said, but for the time being he prefers traditional checking accounts.
"We really encourage people to use a checking account. Just be careful, and don't overdraw your account," he said. (Mitchell Bank does not offer fee-based overdraft protection, which Mr. Maloney called "no better than a payday loan.")