As banks join forces with prepaid-card companies, reputational risks loom.
Many banks are planning to offer reloadable cards as an alternative product for customers who do not qualify for traditional checking accounts or who cannot afford them after banks add new fees. To this end, some banks are looking to partner with third-party companies that operate their own prepaid systems, such as NetSpend Holdings Inc. and Green Dot Corp.
Such partnerships may help banks save time and money in establishing programs, but with prepaid card fees under the constant scrutiny of consumer advocates, and partners of the third parties facing their own regulatory pressures, the onus is on banks to do their due diligence, analysts say.
Some of NetSpend’s biggest card distributors are check cashers and payday lenders, which have been the target of state legislation and consumer-group complaints. MetaBank, the biggest issuer of NetSpend’s cards, was forced by the Office of Thrift Supervision in October to end a high-interest, short-term loan program it offered through prepaid card companies for what the OTS called unfair and deceptive practices. NetSpend has pursued other issuing bank partners to diversify beyond the Meta Financial Group Inc. subsidiary (
“The fact that NetSpend has business partners that are under a great deal of scrutiny may scare some banks away from wanting to partner with them,” said Gil Luria, an analyst with Wedbush Securities in Los Angeles.
Additionally, consumer groups have called for prepaid card companies to lower or eliminate fees for monthly maintenance, paper statements and balance inquiries. Analysts have speculated that the new Consumer Financial Protection Bureau will target prepaid fees.
Executives at NetSpend and Green Dot, two of the largest prepaid program managers in the country, say their fees are low and are clearly disclosed.
If anything, discussions with banks have played “to our favor” by highlighting NetSpend’s transparency, Dan Henry, the Austin company’s chief executive, said in a Marc 3 interview. The fees on its prepaid cards will be equal to or lower than those banks are adding to traditional checking accounts, he adds.
Last week NetSpend announced a deal to sell cards through First State Bancshares Inc., a Farmington, Mo.-based bank holding company that operates the 33-branch First State Community Bank.
NetSpend and its own issuing partners are handling all program functions, including account management and card issuing, essentially making First State like any other distributor.
To First State, “it’s another product that we can offer [consumers] without sending them out of the bank with nothing,” Jennifer Lee, First State deposit operations manager, said in an interview.
In an e-mail on March 3, Lee said the bank researched “a variety of vendors and chose the vendor we felt provided the best product for our customers.”
NetSpend and its vendors are responsible for handling Customer Identification Programs and other regulatory compliance requirements, Lee said.
Small and midsize banks are more likely to work with a third party because of the investment such programs require, whereas large banks may run their own programs, says Jonathan Donahue, the global relationship manager for banking and financial services at Genpact Ltd., a business process outsourcing firm.
Ben Jackson, senior analyst in the prepaid advisory service at Mercator Advisory Group in Maynard, Mass., says he does not believe “people are going to … [say], ‘Oh, well, I see they work with NetSpend and they work with payday lenders, so I’m not going to deal with them.’ … The real question is whether or not a regulator would look at that.”
The probability of that happening is likely low but it highlights the need for banks to make “sure the regulator understands … that this is not an entree [for] trying to get into the check cashing business or payday lending business,” Jackson says.
Depending on how banks structure their partnerships, they also should be concerned with compliance risks, Jackson says. “The bank will need to put some man hours in vetting that all of the things are being done appropriately,” he says.
Steve Streit, Green Dot chairman, chief executive and president, agrees but says the due diligence banks would do when partnering with a prepaid company are no different from its other vendor relationships.
“Banks are in the business of choosing outsource partners all the time,” Streit said in an interview on Thursday.
Green Dot is in discussions with banks that are interested in working on prepaid programs, but there are no deals to announce, Streit said.
