Deal­ing the cards

Un­cle Sam fol­lows the Kar­dashi­ans into pre­paid plas­tic

The Washington Post Sunday - - BUSINESS - BY YLAN Q. MUI

Un­cle Sam wants you to have a pre­paid card, and he’s not the only one. ¶ The Trea­sury Depart­ment is send­ing letters to 600,000 peo­ple this week en­cour­ag­ing them to sign up to re­ceive their tax re­turn on a new govern­ment-is­sued pre­paid card as part of a pi­lot pro­gram to help those with limited ac­cess to bank ac­counts. ¶ On the other end of the spec­trum, re­al­ity TV star Kim Kar­dashian’s name­sake pre­paid card failed just weeks af­ter its launch. She and her sis­ters were shamed into bow­ing out be­cause the card was rid­dled with high fees. ¶ Can these re­ally be the same prod­ucts? The world of pre­paid cards has ex­ploded in re­cent years, trans­form­ing from a way for teenagers who are too young to carry plas­tic to shop on­line into a re­place­ment check­ing ac­count for the mil­lions of house­holds that don’t use tra­di­tional banks. It is one of the fastest-grow­ing seg­ments of the fi­nan­cial ser­vices in­dus­try, with the amount of money loaded onto the cards ex­pected to dou­ble over the next three years to $670 bil­lion. ¶ That has cap­tured the at­ten­tion of pol­i­cy­mak­ers and celebri­ties alike as they seek to tap into the po­ten­tially lu­cra­tive mar­ket of un­banked con­sumers and push the bound­aries of what a pre­paid card can — and should — do.

Com­pa­nies now is­sue pay­checks via pre­paid cards, un­em­ploy­ment and govern­ment ben­e­fits are di­rectly de­posited onto the cards, and con­sumers can use them to pay bills on­line. De­mand for the cards is ex­pected to grow in the wake of new fed­eral reg­u­la­tions that have forced many banks to raise fees on check­ing ac­counts, putting them fur­ther out of reach for many low-in­come con­sumers.

Pre­paid cards func­tion like debit cards: Users load money onto them and then can spend only what they have. How­ever, there are of­ten sev­eral fees. Con­sumers might have to pay for the card it­self and then cover a monthly main­te­nance fee. Charges of­ten are as­sessed for load­ing more money onto the cards, check­ing bal­ances, out-of-net­work ATM with­drawals and even cus­tomer ser­vice calls.

Pre­paid card providers say fees are nec­es­sary to cover the cost of ad­min­is­ter­ing the cards, par­tic­u­larly be­cause they cater to a pop­u­la­tion con­sid­ered to have a higher credit risk. But some law­mak­ers have called for tighter re­stric­tions on the cards, which in­dus­try groups lob­bied to ex­clude from sev­eral key pieces of leg­is­la­tion aimed at boost­ing con­sumer fi­nan­cial pro­tec­tions.

A bill from Sen. Robert Me­nen­dez (D-N. J.) would ban many fees and re­quire more trans­par­ent dis­clo­sures of those that re­main. “ The in­dus­try can still make money . . . but it can do so in a way that’s fairer to the con­sumer,” he said.

Me­nen­dez said he has spo­ken about the is­sue with El­iz­a­beth War­ren, who is work­ing to set up the new fed­eral Con­sumer Fi­nan­cial Pro­tec­tion Bureau. He in­tro­duced the bill last year and plans to sub­mit it again this ses­sion. It is co-spon­sored by Sens. Richard J. Durbin (D-Ill.) and Jeff Merkley (D-Ore.)

The wide range of fees and pro­tec­tions as­so­ci­ated with the cards prompted the Trea­sury to pro­pose new rules for pre­paid cards loaded with govern­ment ben­e­fits, the most rapidly grow­ing cat­e­gory. The rules, which take ef­fect Fri­day, pro­hibit us­ing cards that can carry a line of credit. The cards must also pro­vide the same con­sumer pro­tec­tions as bank ac­counts, and the money on the cards must be in­sured by the Fed­eral De­posit In­surance Corp.

For govern­ment agen­cies, mov­ing from paper checks to pre­paid cards is a way to cut costs. Richard Gregg, fis­cal as­sis­tant sec­re­tary at Trea­sury, said is­su­ing a check costs more than a dol­lar. Load­ing the re­funds onto pre­paid cards costs roughly 10 cents each. With about 45 mil­lion peo­ple re­ceiv­ing their tax re­funds by check, the pi­lot pro­gram could re­sult in enor­mous sav­ings.

The pro­gram will of­fer two cards: one with no monthly fee and one with a $4.95 charge. Trea­sury of­fi­cials said they wanted to see how many peo­ple sign up un­der each model be­fore con­sid­er­ing whether to roll out the pro­gram na­tion­ally. Both cards carry a $2.50 fee for out-of-net­work ATM with­drawals and a $4.95 fee for load­ing cash or or­der­ing a re­place­ment card. They do not charge for cus­tomer ser­vice or bal­ance in­quiries, in net­work ATMs or di­rect de­posits.

“We view this as an op­por­tu­nity to learn,” Gregg said. “One way or an­other, we’re go­ing to be mov­ing ahead with elec­tronic pay­ments. What the mix is, we haven’t de­cided yet.”

Trea­sury of­fi­cials also said the move to­ward pre­paid cards is part of the Obama ad­min­is­tra­tion’s ef­fort to pro­vide more ser­vices to un­banked house­holds. A 2009 sur­vey by the FDIC found that a quar­ter of Amer­i­can house­holds have lit­tle or no ac­cess to tra­di­tional bank­ing ser­vices; they in­stead rely on a makeshift al­ter­na­tive fi­nan­cial sys­tem of check cash­ers and pay­day len­ders, along with newer prod­ucts such as pre­paid cards.

Mi­nor­ity groups had the high­est per­cent­age of un­banked house­holds, with nearly 22 per­cent of black house­holds re­port­ing that they do not use banks. African Amer­i­can ra­dio host Tom Joyner said statis­tics like those are why he de­cided to launch a pre­paid card branded with the name of his com­pany, Reach Me­dia. “When Amer­ica has a cold, [the African Amer­i­can peop­u­la­tion] got pneu­mo­nia,” Joyner said in an in­ter­view. Af­ter the re­ces­sion, “Amer­ica has pneu­mo­nia, and we’re on life sup­port.”

The card de­buted this month and in­cludes an ac­ti­va­tion fee of $9.95 and a monthly charge of $8.95. The card also charges fees for out-of-net­work ATM trans­ac­tions, and re­tail­ers may charge for some types of cash reloads, but cus­tomer ser­vice calls and bill pay­ments are free.

Joyner is not the only pub­lic fig­ure to is­sue his own card. Hip-hop mogul Rus­sell Sim­mons has long pro­moted the RushCard and is en­cour­ag­ing users to di­rectly de­posit their tax re­funds on it. The card costs from $3.95 up to $14.95 for one with a fancy pink de­sign. The cards carry a host of fees, in­clud­ing 50 cents for ATM bal­ance in­quiries, $2 to en­roll in bill pay and a monthly charge of up to $9.95.

The Kar­dashian Kard car­ried fees of nearly $100 a year be­fore the card was pulled from the mar­ket. It also car­ried a $6 can­cel­la­tion fee — which may seem like a bar­gain com­pared with the $75 mil­lion law­suit the Kar­dashi­ans are fac­ing for pulling out of the card con­tract.

EDEL RO­DRIGUEZ FOR THE WASHINGTON POST

DONNA MCWIL­LIAM/AS­SO­CI­ATED PRESS

Talk-ra­dio host Tom Joyner has launched a card branded with the name of his com­pany, ReachMe­dia.

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