Prepaid card companies are seeking out relationships with non-profits that provide direct services to clients. For the card companies, it is a winning prospect. They get new customers, and they gain the benefit of partnering with groups that are perceived as trustworthy to low-income households.
The main point of the CFSI report is to create a framework for how non-profits can make those decisions. This is a worthwhile premise, because a non-profit facing the decision of whether or not to partner with a prepaid card companies must wade through some difficult questions.
If you understand how for-profit prepaid card company makes money, then it becomes
more apparent why they would want to "engage" with non-profits. Prepaid debit cards are a volume business. A lot of money is made by card issuers on interchange fees. At each stage, different entrants face high fixed costs. Firms have to establish a distribution network, develop card technologies, and putt into place the right safeguards.
Once the operation is set up, margins are low. Consumers do put deposits on to their cards, but it is not very much. Most un-banked and under-banked households are living paycheck-to-paycheck. By the facts of their circumstances, it is unlikely that many will leave $2,000 in a deposit account on their card.
It is still a good business because transactional costs are also fairly low. That means that the business depends on getting a lot of consumers. Finding customers is not easy. The CFSI report mentions that it costs between $50 and $250 to find a customer.
About the Report
The CFSI report is generally upbeat about prepaid cards and also about these partnerships. It does a good job of explaining how the process works. They opine on the value offered to non-profits. According to the report, "examples of the types of non-profit orginizations that might be well-suited for this option" include:
- credit-counseling agencies
- non-profits that try to get their clients into low-cost checking accounts
- affordable housing providers
- workforce development organizations
- domestic violence agencies
The project is funded by three groups, including NetSpend. NetSpend manages card programs and markets them through relationships with all kinds of distributors. NetSpend is in the process of taking its stock public. They have announced their intention to offer an IPO, although the date hasn't been set.
CSFI glosses over the issue of the quality of credit offered with these cards. These cards are becoming a new vehicle for credit. CFSI states the facts: the MetaBank issued cards (which have a relationship as the preferred issuer for NetSpend accounts) come with a line of credit that has an APR of 150 percent, whereas the Emerald Advance line of credit costs either 36 percent or 9 percent. It doesn't make an effort to dissuade the use of those high-cost loans.
They really need to be more forthcoming about the quality of those NetSpend loans. The APR might be as low as 150 percent, but if a consumer takes out a loan for less than the maximum period of time (35 days), the APR can run beyond 1000 percent. That is a very problematic feature. There is also the issue of what kind of company is kept by the NetSpend card. The CFSI report doesn't mention that over one-third of NetSpend revenues come from Ace Cash Express, either. I think that any non-profit should be very cautious about bringing its clients an opportunity to get on board with a payday lender. That's just me, though.
Non-Profits Should be Careful
Non-profits should practice some stewardship of their own reputation in the community. Trust is an important asset. People go to a non-profit for help because they feel like they will be safe. They place some faith in the advice they get at a VITA site or from a housing counselor.
The partnership issue matters because it seems like there are going to be more entreaties to non-profits in the near future.
The other day, a card company approached our VITA site about a partnership. The VITA site gets about $15 for each new customer. The VITA site then gets a portion of fees from card swipes at point of sale purchases and at ATMs. It may be a good deal, and I'm not intending to suggest otherwise. I do feel that it is difficult for a non-profit to make that judgment. It affects cash flows, which are relatively certain, but also the reputation of that non-profit. It is hard for a non-profit to gauge how such a partnership would influence their public face.
I mentioned earlier that the costs for getting new customers is high. It becomes clear that any business that can come from a non-profit is going to be very profitable for the "for-profit." It is a different question for a non-profit.
note: the author of this blog does not get any funding for reports or conferences from NetSpend or Green Dot.