Pulling Back on Prepaid

  Bank of America Corp., the nation's largest issuer of debit cards tied to demand-deposit accounts, also has been one of the leading issuers of Visa-branded prepaid debit cards. The Charlotte, N.C.-based bank, however, is cooling on the prepaid trend.
  BofA recently cut sales of unreloadable Visa prepaid gift cards sold by telephone and over the Internet. The bank also has stopped selling the reloadable Visa Buxx card designed for parents to give to teenagers as an alternative to giving them credit cards. BofA is still loading value onto existing Buxx cards for customers, but it stopped selling new Buxx cards in January, a bank spokesperson says.
  Neither prepaid card was sold in BofA branches, and the bank is re-evaluating its prepaid debit card product line, the spokesperson says.
  Although both products have sold well on their own, they have not provided the level of new banking customers that BofA expected. "We are not getting the relationship value," the spokesperson says. Visa gift card sales at BofA increased by about 75% in 2004 from the previous year, but the one-time sales generated few new accounts, she says.
  The bank will keep issuing Visa gift cards sold by Simon Properties Inc. at Simon's malls. It also will continue offering its SafeSend money-transfer product, which is supported by Visa-branded prepaid cards, says the spokesperson.
  Unlike other prepaid products, SafeSend requires a continuing relationship with the bank. The product is designed to attract new depositors by offering a prepaid card that Hispanic customers can send to relatives in Mexico.
  BofA customers load SafeSend funds, which recipients can retrieve at ATMs in Mexico using a second debit card. BofA recently eliminated various fees applied to SafeSend cards.
  Despite BofA's decision to scale back its prepaid Visa prepaid card programs, the market for bank-issued gift cards is expected to grow to $31 billion in 2007, up from $3 billion in 2003, according to TowerGroup, a research company owned by MasterCard International.
  The move by BofA to end the sale of Visa gift cards and the Visa Buxx card reveals a more systemic problem with some of Visa's prepaid products than an inability to help create new bank relationships, says Dave Lott, a principal at the Atlanta-based consultancy Collective Dynamics. Visa's rules for reloadable cards require the purchaser's name to be embossed on the plastic, he notes. MasterCard does not require a name on its reloadable prepaid cards, but it does require the card purchaser to present identification.
  The rules difference means that bank branches can issue MasterCard-branded prepaid cards on the spot. Consumers have to wait about two days for delivery of a reloadable Visa prepaid card, Lott says.
  Visa may have to change the embossing rule for issuers to compete more effectively for prepaid debit sales, says Lott. "These have been markets with tremendous potential," he says. "If they want to be in that segment, and their members keep running up against the wall on this issue, Visa is going to have to evaluate its rule."
  New York Community Bank is among the issuers that have embraced MasterCard-branded prepaid cards. The bank, which operates more than 140 branches, recently introduced an instantly issued, reloadable MasterCard prepaid debit card. The bank also sells the Visa gift card but is focusing its prepaid efforts on the newer MasterCard product, which is sold to the same type of customers as the Buxx card.
  Lott says using embossing as a tool to prevent fraud and to track the use of prepaid debit cards in money-laundering schemes may not be needed. There are other ways to prevent fraud and money laundering, such as setting limits on how much value can be stored on a card, he says.
  Richard Lyons, MasterCard senior vice president, says while MasterCard has "great aspirations" for the future of prepaid debit, he says some financial institutions may have gotten into the market without a sufficient business plan. "There was a rush by many financial institutions to get into the prepaid space without really having a thought-out strategy," he says. "It's difficult to be all things to all people in prepaid."
  In a written statement, Visa says despite BofA's decisions it expects more financial institutions to embrace its prepaid debit cards. "We continue to see strong growth opportunities within this segment, as more than 450 member financial institutions offered gift card programs last year, and the bank branch distribution channel gained momentum," the statement reads.
  At least one BofA gift card has come under attack by state regulators. Several states have filed lawsuits alleging that Simon is violating state consumer-protection laws that cap fees for non-use of the BofA-issued Visa cards it offers. Simon contends that because a nationally chartered bank issues the card, state laws do not apply.
  The U.S. Office of the Comptroller of the Currency, which oversees nationally chartered banks, has not supported Simon's views because Simon is the marketer of the card, not BofA, and it sets the fee policies.
  New York Attorney General Eliot Spitzer dropped that state's suit against Simon after the mall owner agreed to drop its $2.50 monthly card-maintenance fee that was imposed on cardholders after a year of nonuse. Simon also agreed to pay a $125,000 penalty and to more clearly disclose its gift card fees and policies. Simon still faces similar lawsuits in Connecticut and Massachusetts.