Amex Prepaid Card Makes Lemonade Out of Durbin
When American Express launched its prepaid card recently, experts compared it to the dominant prepaid cards in the market and called attention to the differences.
Amex has low (or nonexistent) fees vs. $4.95 per month for most Green Dot customers; Amex lacks FDIC insurance on the customer's money; its card has more limited payment capabilities (no bill paying or P-2-P payments); and unlike leading prepaid cards, Amex's is not issued by a bank.
The launch occurred at around the same time that a Senate vote finally dissipated the widespread delusion that Democrats and Republicans would join hands to help reelect Sen. Tester (D-Mont.) by passing his legislation to sidetrack Durbin. Coincidence?
As a result of this vote, interchange on qualifying prepaid cards is slated to be a lot higher than other debit card interchange — starting in just a month. Amex's product design presciently reflects this. In their Cardmember Agreement, they underscore the fact: "The Card...does not constitute a checking, savings or other demand deposit or consumer asset account."
In other words, it's not a Durbin-impacted "debit card." Their saying this isn't enough to make it true. But in my view, it is true.
Here's why this matters.
Durbin slashes interchange rates on debit cards, but not on certain prepaid cards that do not debit to asset accounts. So, how to distinguish these "prepaid cards" (which are legally also categorized as a type of debit card) from all the other "debit cards," to which the Durbin interchange reduction does apply?
You might think the crucial difference is that a debit card that isn't a prepaid card simply debits a checking account —while a Durbin-exempt prepaid card is a piece of plastic, not tied to a checking or other bank account.
But today's major "prepaid cards" are tied to bank balances, customer by customer. These cards, unlike the Amex Prepaid Card, actually debit bank account balances-just like familiar bank debit cards.
Let's look at a couple of them. The NetSpend web site does not actually say their card is a "debit card." Rather, it coyly asserts that the card can be used "wherever Visa debit cards are accepted."
Green Dot's site is more explicit. Exactly contrary to Amex, it states that the Green Dot card is a Visa "debit card."
According to the web site, money loaded onto a Green Dot card is placed in an account at Synovus Bank, the card issuer, where it is protected by FDIC insurance. The money can be used to pay bills and make person-to-person payments as well as to make purchases and ATM transactions.
Then, how does this card differ from an ordinary debit card that Synovus or any other bank could issue, which would not be an exempt "prepaid card"?
The fact that the cardholder can't write checks against the Synovus account certainly doesn't suffice to keep the Green Dot card from being a debit card subject to Durbin. (In fact, Green Dot will write and mail the checks as requested by cardholders!)
Durbin applies to any card that can debit against an asset account — whether or not that asset account is a checking account. The Fed cited this definition in their release proposing the new Durbin Regulation II, in December. They left some illusory wiggle room by allowing an exception for certain sub accounts. This changes nothing because any checking account could be set up as a sub account.
No, the Green Dot card is simply a debit card on a bank account. Same for NetSpend, Account Now and Western Union? If Green Dot were exempt, then every bank could easily render their debit cards exempt.
What is it that makes the Amex Prepaid Card different from the earlier debit cards — most of which were designed before Durbin and have not been adapted to reflect Durbin?
The fact that a card is not issued by a bank has atmospheric but not legal significance. Likewise for the absence of FDIC insurance. Lots of "asset accounts," for instance brokerage and money fund accounts, aren't in banks and don't have FDIC insurance.
The difference is that by prohibiting all non-card withdrawals, in particular bill and P-2-P payments, Amex presents a product that does not connect or debit to an "asset account."
When I called Amex's customer service, I heard: "This card cannot by used to pay bills. It cannot be used to put money into a PayPal balance or make person-to-person payments." No sugar coating, no winking.
We've all had more than a year since the passage of Durbin to squeeze lemonade from this lemon. Only Amex did it. The others haven't yet. Durbin gives Amex a key competitive advantage — which for a typical customer can amount to $50 or more per year in additional interchange revenue. Other prepaid card companies' earnings will decline starting July 21.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of Providian Financial Corp. He can be reached at email@example.com.