I naively thought that Suze Orman's new prepaid offering, the Approved Card, would help turn the tide of negativity. Instead, it has had the opposite effect, creating a seemingly endless echo chamber about the evils of prepaid.
Prepaid debit cards were born a decade ago but came of age during the recent financial crisis, when the notion of financial innovation as a force for good lost all credibility. The timing has been tragic, shifting the focus from the promise of prepaid to the perils.
Prepaid cards are virtual bank accounts, and they represent a truly new point of financial access at a time when access is diminishing. Anyone can qualify for one, regardless of credit history. Only good funds can be loaded, so cardholders have the immediate liquidity they need, and they can't spend what they don't have. The cards are accepted nearly everywhere and can be used to pay bills, send money home, make purchases, and save.
The criticism about the Approved Card is largely focused on two issues — fees, and whether Orman can be trusted. It is worth dissecting these issues further to paint a fuller picture of the merits of prepaid and the challenges that innovators have in meeting the market need.
The monthly fee for the Approved Card is $3, which is at the low end of the prepaid market and is well below the typical $8 to $15 monthly fee banks are now charging for checking accounts. Many basic features of the card are free, including daily text messages of the card balance and a year of free access to credit reports. The website provides users a personalized "dashboard" to analyze spending patterns and set notifications of upcoming bills. Users can also set up as many as six "goal funds" for saving money.
The biggest headlines have been about the sheer number of fees associated with the card. The fee schedule is easy to find on the card website, and if you count every possible fee listed, you get 20.
The biggest category of fees is for ATM use. While domestic ATM cash withdrawals are free with direct deposit, the fee schedule lists seven other types of ATM transactions — from balance inquiries to declined transactions, both domestic and international — all ranging from $1 to $2.
The other major category of fees is for bill payment. Electronic bill payment is free. Having the company issue a paper check, a valuable service that few providers offer, costs $1. Most of the other fees are for less-common issues like re-issuing a check.
Contrast the Approved Card fee schedule with the new "plain language" checking account disclosure adopted recently by Chase. It runs three pages long, includes seven footnotes in tiny type, and lists 29 possible fees.
It includes fees for obscure services that prepaid cards don't tend to offer, such as "collections, bond coupons." Its ATM fees are also simpler — free at Chase ATMs, $2 everywhere else, regardless of the type of transaction.
On the other hand, it has two sections on check and debit overdrafts, along with footnotes and links to a website for more information, and a section explaining when deposits are available. Most prepaid cards don't need to worry about either issue, as cardholders can't spend what they don't have, and funds are available as soon as they are loaded.
Tallying the number of fees simply doesn't tell the full story. Orman has been saying just that in interviews and in the blogosphere, but her message isn't getting through — in part because of concerns about her credibility. How can Orman be trusted to give financial advice now that she is a financial provider?
This is one of the biggest challenges for the prepaid industry. Reaching the underserved and the disaffected is challenging. They are skeptical of banks, and they don't have many places to turn for financial advice. Celebrity endorsements can help cut through the clutter and confusion – but only if there is someone to police the marketplace and set clear quality standards.
Government regulation can help, and the CFPB should take steps to strengthen basic consumer protections for prepaid cards, including requiring FDIC insurance coverage, stronger electronic funds transfer protections, and a fee disclosure box.
Industry also has a role to play in building trust with consumers by coalescing around a set quality principles that go beyond the bare minimum. Prepaid companies need to look beyond "must do" practices and think about adopting aspirational, "should do" practices that provide real value to their consumers and to the bottom line.
Until the bar is raised industrywide, prepaid will be stuck in a negative news cycle.
Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation.