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Hybrid cards are among the latest payments innovations that target low-income consumers and individuals who need a few extra dollars to meet their financial obligations until payday, says Ken Paterson, director of the Credit Advisory Service at Mercator Advisory Group Inc. in Maynard, Mass.
The network-branded cards are called hybrid cards because they are prepaid products that include a line of credit, usually less than $1,000, says Paterson, principal author of Mercator's 30-page report "The Rise of Hybrid Credit/Prepaid Cards."
"There always has been a need out there for short-term loans, and there always has been a question as to how best to serve them," Paterson says. "The hybrid card combines a short-term loan with the convenience of a prepaid card that can be used at the point of sale."
H&R Block Inc., which issues the MasterCard-branded H&R Block Prepaid Emerald Card, enables its customers to have their federal and state income tax refunds downloaded into their Emerald card accounts.
In addition, cardholders can take advantage of Emerald Advance, which is a line of credit H&R Block offers Emerald prepaid cardholders, Nancy Mays, an H&R Block spokesperson, tells ATM-&Debit News.
H&R Block charges a 36% annual percentage rate on the loan. The high interest rate, however, has not deterred the company's customers from taking advantage of the line of credit. Last year, H&R Block issued 887,000 Emerald Advance lines of credit, say industry officials.
Emerald cardholders can cut the interest rate on the loan to 9% by opening a deposit account with H&R Block Bank. The Emerald Prepaid card also offers the H&R Block Emerald savings account, Mays says.
Meta Payment Systems, which is owned by MetaBank of Storm Lake, Iowa, is another hybrid card issuer. Both companies began offering lines of credit to prepaid cards last year.
MetaBank, whose product is called iAdvance, provides lines of credit to its partners.
They include MoneyGram International, the global funds-transfer company, and Jackson Hewitt Inc., a tax-preparation company. MoneyGram issues the MoneyGram Visa debit card, and Jackson Hewitt issues iPower, a Visa-branded prepaid card. An iPower cardholder can borrow from iAdvance in increments of $20.
When a cardholder borrows $20, he must repay $22.50, which is an annual percentage rate of 150%, Paterson says.
Cardholders also have to request a credit advance either online or through MetaBank's interactive voice response system that enables a computer to detect the caller's voice input, says Nicole Pullman, a MetaBank spokesperson. "It has to be a conscious decision," Pullman says. Cardholders also are discouraged from becoming chronic borrowers.
Despite hybrid cards' high-interest rates, they are much less expensive than other forms of credit, says Kimberly Gartner, associate director of the Center For Financial Services Innovation, a Chicago-based organization that works with the underbanked.
"These cards are priced better than other options–payday loans or bank overdraft fees," Gartner says. "We think hybrid cards really meet the needs of underserved consumers. Many people buy prepaid cards thinking the cards are helping them build credit. The hybrid card helps them build credit."
Adil Moussa, an analyst with Aite Group LLC in Boston, agrees.
"Hybrid cards are good for immigrants who don't have credit or individuals who are attempting to re-establish their credit following bankruptcy," Moussa says. ATM
