Metrics for Debit Card Policy

The popularity of debit cards seems to have blossomed faster than the ability of wonks to find a means to describe them.

General purpose reloadable (GPR) cards are going to be the new way for low-income households to access the payments system. NetSpend estimates that LMI households will need to deposit more than $1.1 trillion in paychecks and government payments annually.  They may put some of those deposits into banks. However, they’ll also use check cashers. Even so, many will end up on GPR cards.

Visa says that the prepaid market, which would include the GPR cards, is going to transact more than $3 trillion in business this year.

All of this points to the relevance of the GPR market. Yet, in spite of that, activity in this area by policy makers and consumer advocates is still nascent. The Fedreal Reserve has established a toehold with its payments center, based out of the Philadelphia Branch. Certainly, CFSI has also developed its own position.

There are others, but what is still lacking is a simple framework for evaluating those cards. At a recent meeting in New York, one group put forward a “best in class” model that could be set out as an ideal. In the framework, the ideal card is defined by its lack of penatly fees. Penalty fees include overdraft charges. Although that would seem to contradict the assumption (and the appeal) of a prepaid card, those overdrafts do exist. In NetSpend’s S1, they report that they derived 6 percent of their operating revenues from overdrafts during 2009.

To me, that is a good principle, but it has the problem of creating a standard that does little to distinguish between second-best cards. In other words, there may be a card that can claim that it has no penalty fees, and in that instance, it would be the “ideal.” But what about the rest? They would all be equally “not ideal.” As well, how does this system account for improvement over time?

I would like to put forward the idea that we evaluate cards by how they make their money.  A no-fee card would be great, but then again, such a card would not make it in the marketplace.

I think that we should characterize “good” or “bad” based on the degree to which the revenue from these cards is built upon interchange fees. Remember that there are penalty fees.  There are also interchange fees and service card fees. Interchange fees are created by transactions. The vendor gives up 1 or 2 percent of the sales price. The amount depends upon all kinds of variables: is it a PIN transaction? Is it online? Does it require a signature? Which card is it?

Service card fees are charged to the consumer. They include fees charged for maintaining a card. They include ATM fees and balance inquiry fees. They include lost card fees. There are plenty of categories, but they all are alike in that it is revenue that is paid from the consumer.

GPR card companies can make money side-by-side with their customers, or at the expense of their customers. I think this framework makes that distinction.