How Banks Can Keep Customers They're Losing
Due to ever-increasing compliance requirements, consumers have already lost free checking. Now, the Bureau's sights are set on general purpose reloadable prepaid cards.
More millions of bank checking customers are turning to prepaid cards and PayPal for much of their spending. These are not the unbanked—people we can't serve profitably. No, these are checking customers, who have been generating profitable fees for banks.
They stop incurring overdrafts, they start putting their pay on prepaid debit—and soon, they won't need checking accounts. This then spreads to people with more income and less chaotic finances, as you fail to slash branch costs, struggle with increasing restrictions on overdraft fees—and make more people pay more for "checking."
Some banks have reacted by assigning vice presidents or even senior vice presidents of prepaid, who go to conferences and hire consultants. Sometimes one of them tells me she'll offer the bank's own me-too prepaid debit card in branches. Dismal, thoughtless, often a dead loss.
You can hold good customers and attract more by understanding what draws them to prepaid cards—then offer them greater value.
The message drawing people with checking accounts into prepaid is that they can avoid overdrafts and thus control their spending, incurring understandable and reasonable fees. A card that costs $5.95 per month plus transaction fees sounds reasonable compared to $10 or $15 per month for checking accounts, $35 overdrafts and more.
But prepaid debit winds up expensive too. You pay for face-to-face transactions for which banks don't charge fees. NetSpend even charges for automated telephone balance inquiries.
For his nickel-and-dime fees, the card buyer (!) actually gets very little. Grudging and limited access to electronic bill payment, which is now the dominant method of bill payment. (Maybe Walmart prefers having the bills paid through a teller at its Financial Centers. "Express fees start at $3.95.") No paper checks, even though credit cards have offered them for decades. And the customer has no opportunity to build credit—an important aspiration for most, if only because they want to make a lower apartment deposit or buy a used car with smaller down payment.
Here's what Green Dot says: "Because no credit is granted and no payments are required, this card does not build credit history"—it will not "build my credit rating."
Hardly a selling point. Maybe that's why Green Dot buries it amidst 74 other FAQ's.
The company's No. 1 headline benefit: you can buy the card with "no credit check." But the fact that you can obtain a card without passing a credit check needn't prevent you from using it to improve your credit. The opposite should be true.
The prepaid debit card has evolved into a degraded bank checking account at a no-name bank, providing a debit card, no checks and limited or no electronic bill payment. Plus of course FDIC insurance—which Green Dot, for one, sometimes discloses in a coy, subliminal way that could leave some doubt. The intriguing implication is that for $200 at risk, customers don't even care. (They shouldn't!)
That's all these cards do for customers, many of whom soon throw them away and may then try another, perhaps hoping it will cost less. A disposable product.
As a bank, you can offer much more.
How about a prepaid credit card that generates four times as much interchange, and thus can pay for rewards; gives the customer full access to all forms of payment; and builds his credit at the major bureaus? No overdraft fees, no credit risk.
What's a prepaid credit card?
I envision a greatly enhanced secured credit card, a real credit card. Amounts loaded to the card first pay off any borrowed balance, and any remaining portion increases the security deposit—which starts with whatever amount the customer chooses. (The credit line equals the amount on deposit.) It's always 100% available to support debits, and the cardholder can take the money back when it's not needed to support debits. The annual percentage rate is 0%, forever. No late fees, no adverse reporting to the credit bureaus ever, no overdrafts. Same monthly and transaction fees as on prepaid debit cards—or whatever you like. Pursuant to the Durbin rule (also known as Regulation II) this is a credit, not a debit card—because it does not debit to an asset account.
Impossible? It's impossible for the current crop of prepaid debit card companies. If they own banks, as Green Dot now does, the FDIC won't let those banks provide card credit—any more than they'll let Walmart own a bank. If a prepaid company doesn't own a bank, regulators won't allow its card-issuing bank to provide "BIN rental" (BIN as in bank identification numbers with Visa or MasterCard) for credit cards.
Maybe the prepaid credit card is impossible for your bank, too—most likely because "WE'RE not going to provide ANY credit to THOSE people" (except overdrafts!) But it won't be impossible for your competitors.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian. He can be reached at email@example.com.