Two months after Wal-Mart Stores Inc. slashed fees on its prepaid cards, a high-profile competitor is rethinking its notably expensive product line.
It likely will not be the last.
Russell Simmons, the music industry mogul whose Rush Communications Inc. offers the prepaid RushCard, gave a nod to Wal-Mart's prices last week as he discussed a plan to introduce new cards.
"Wal-Mart is a different card from my card, but it does some good," he told reporters. "We watch them. We figure out about their price structure. We say, 'Oh, there are some cases under which, if we just charge [cardholders] a flat fee per month, they would save money, rather than the way that we charge them up to $10 per month.' So we're creating a card that will address that."
Rush Communications does not plan to lower the fees on its current cards, Simmons said. "We wouldn't change our fees. We'd create different cards with different fee structures."
Observers called this one of the first industry repercussions of Wal-Mart's price cuts.
"Whenever Wal-Mart comes into a market … their business model is very well known, and for them, it's very successful," said John R. Ulzheimer, the president of educational services at the lead generator Credit.com Inc. "I don't think this is going to affect just the RushCard people. It's going to affect everyone who issues prepaid cards. They can't ignore this."
The RushCard fees include an up-front activation fee of $19.95 and a $1 fee for each transaction, though that fee is capped at $10 a month.
Wal-Mart, in contrast, now charges $3 each to buy, reload and use its MoneyCard on a monthly basis. The retailer does not charge a per-transaction fee for purchases on its cards.
Even before reducing its fees in February, Wal-Mart usually charged a smaller amount than RushCard. The MoneyCard had a setup fee of $8.94, a reloading fee of $4.64 and a monthly maintenance fee of $4.94.
The pricing structure for the RushCard "is out of step with where the mainstream industry moved," said Jennifer Tescher, the director of the Center for Financial Services Innovation, a nonprofit affiliate of Chicago's ShoreBank Corp.
Despite the fees, Simmons' celebrity has made the RushCard and the BabyPhat RushCard (both of which run on the Visa Inc. network) among the most visible prepaid products on the market.
His company claims to have more than 1.5 million cardholders, putting it on par with Wal-Mart, which says it has surpassed 1 million users and is on its way to 2 million, and H&R Block Inc., which said its Emerald Card had more than 2.6 million holders during its last fiscal year. The tax preparation company has said it expects the total to exceed 3 million this fiscal year, which will end April 30.
Tescher said she hoped the introduction of a cheaper version of the RushCard would help improve the prepaid industry's reputation.
"Because of the sheer force of Russell Simmons and the fact that he's such a well-known personality, that card tends to get a lot of attention from mainstream media when talking about the prepaid industry," she said. "Whether or not it's one of the popular or well-used cards in the market, it gets a disproportionate share of attention, so how the card is priced and structured has a bearing on how the industry is perceived."
Simmons said he welcomed increased competition in the prepaid card industry. "The more, the better," he said. "I think more people are catching on and may find that, if you support this community, you have a chance to actually find a margin."
He was responding to American Banker's questions during a conference call meant to introduce an online budget management tool for RushCard holders. The tool lets cardholders set monthly spending limits by category, including auto, dining, and utilities. It can also send cardholders text or e-mail alerts when they exceed those limits.
William H. McCracken, the chief executive of Synergistics Research Corp., said Rush Communications will need to go beyond these tools and lower the fees on its current cards to remain competitive, especially among underbanked Hispanics. "In our broad popular culture, [Simmons] is a well-known name, but if you ask yourself who are prepaid cards being marketed to, it's the lower household income segment of our population," he said.
Simmons "has very high recognition in the African-American community," but according to Synergistics, only 3% of prepaid card buyers are African-American.
For Hispanics, who make up 8% of prepaid card buyers, "the name Russell Simmons doesn't have that much resonance," McCracken said.