Credit is back on prepaid, but in a new iteration that sheds much of the baggage associated with the MetaBank i-advance. Tandem Money is in the process of beta testing a new product that combines a spend, a save, and a line of credit function on one card. The card uses some of the best practices developed by behavioral economists on how best to convince people to save money.
The most intriguing thing - and possibly the most dangerous as well - is that Tandem Money uses
a dual issuer model. The Tandem Money/Insight Card uses two issuers - one for the spend and then the other for the savings/line of credit.
"I tell people it is as if a consumer put their paycheck on to an account at Wells Fargo via a direct deposit," says Tandem Money CEO Trent Sorbe, "and then sent those dollars through an ACH over to an account at US Bank."
In doing so, the card sidesteps rules prohibiting issuers from offering credit on a card whose funding comes from government benefits payments (at least some kinds of government benefits). Normally, Treasury rules would prohibit a card from accepting a Social Security direct deposit if the account came with a line of credit.
Tandem Money's approach is perfectly legal. Its innovation is less a challenge to the character of TM but more of a clarion call to the regulators (FTC, CFPB) that are charged to police the EFTA.
The video below shows some marketing materials created by Tandem Money.
Here is how Tandem Money works:
- The customer gets an Insight MasterCard issued by Urban Trust Bank.
- He or she sets up direct deposit on to the Insight Card. The Insight Card is a partner for TM's beta test. The partnership gives TM a means to build a customer base for their beta test.
- The consumer applies to Tandem Money for an account.
- If the application is accepted, then Tandem Money establishes two new sub accounts - a savings and a line of credit. Premier Bank (Rock Valley, Iowa) is the issuer for those two accounts. The fact that the line of credit is offered by a bank that is different from the one that accepted the direct deposit means that the account is treated differently under the Electronic Funds Transfer Act.
- You have to be a saver to be a borrower. The customer must agree to transfer at least twenty dollars per month to the savings account side of their tandem money account. The account earns one percent interest.
- The customer can tap the line of credit. Notably, though, the line of credit is not accessed merely by over-drawing the spend side of the account. In fact, there is no overdraft on any prepaid card with a Tandem Money account. Remember that the Insight Card is one of the few prepaid cards that does have overdraft. Nevertheless, the Tandem Money accounts are restricted from overdraft capability. To access the credit, the TM account holder has to go to the TM website and initiate the process of moving money from the credit line over to the spend side.Tandem uses a formula, based upon the size of the direct deposit and the longevity of the direct deposit history, to determine the line of credit amount.
- The consumer pays a fee of between 6 and 10 percent of the loan amount when the money is transferred to the spend. There is flexibility in how the line is repaid. Some customers can qualify for more installments - just as some can qualify for lower interest rates or higher credit lines - by passing some underwriting standards. In any case, at least some of the loan principal is due at the time of the next direct deposit.
Not everyone qualifies for a Tandem Money account. There is an underwriting process that includes a filter to make sure that the consumer has adequate income relative to their debt service obligation. As part of KYC, Tandem Money hires IDology to verify that the applicant is who they claim to be.
Sorbe says that he expects that the ratio between savings and line of credit utilization will go up as accounts age. The pattern he sees now on the savings side goes something like this: $20 at the beginning of the first month, nothing at the end of the second month, $40 by the third month, back to nothing at the end of the fourth month, and then $60 by the end of the fifth month. The path is up and down but the long-term dynamic moves upward.
Sorbe contends that the real cost of the credit is lower than it might appear. "The cost is not 36 percent in the first month," he says, "but [when viewed from] somewhere in the 9 to 18 month time horizon, the interest rate is less than 36 percent." Through a lens that excluded the portion of dollars coming from the savings account, the APR for a two week advance with a 10 percent origination fee would easily top 240 percent. But Sorbe's point is that you can't count just the funds that come from credit. The money from savings, he suggests, is probably money that the consumer would not have had were it not for the automatic savings transfers. They are paying less interest for the same spend because they are tapping a short-term need with at least some savings.
Sorbe hopes that Tandem Money can move to its own branded prepaid card by as soon as September. He does not yet have a contract for an issuer for the card, but he says that he wants to have fairly simple pricing built around an upfront monthly fee, a charge for ATM transactions, and no charges for customer service.
This could be a controversial product, particularly if people conflate the potentially dangerous idea of a dual issuer model with the specifics of this card. There are some virtues to Tandem Money - it probably will incent savings, it has no overdraft, and it reports to the big three credit bureaus - even if it also has a very expensive credit line. Regardless of whether you like Tandem Money's features and costs, the headline to me is the emergence of a new card model that invites the possibility of new regulatory subterfuge.