Owing to an expectation that their product would never escape the ire of regulators, investors have pulled out from Tandem Money. The company appears to have closed at the end of last month.
"Tandem Money is no more," said Insight Card Services CEO Bill Smith. "We decided not to continue. We had a hard time seeing how the product would handle the scrutiny."
Tandem Money was more than just a prepaid card with a line of credit. It offered a suite of financial services on a
prepaid card. The TM account was designed to use the carrot of credit as a means to help people build savings. The TM screen had a easy-to-understand graphical interface. It gave an account holder the ability to track their progress as a saver and to estimate the impact of their borrowing habits.
"You have to be a saver to be a borrower," said Trent Sorbe, TM's principal.
There is a way in which this moment is a Pyrrhic victory for anyone that spoke out against this idea (and I count myself in that group). If TM was judged negatively because it had credit, then much of the story was lost. Getting credit may be the carrot that provokes low-wealth people to save. Today, though, it seems clear that any TM phoenix would have to find a new carrot.
At last summer's CFSI Underbanked Financial Services Forum, Sorbe presented TM to an audience that was largely receptive. Nonetheless, regulators and some consumer advocates took a different response. That critique proved to be the deciding voice.
Tandem Money presented three questions:
- Should credit be available through prepaid?
- What further possibilities might develop from Tandem's idea to use two issuers - one for credit and savings and then another for transactions and to receive direct deposits - and would that lead to highly problematic payday loan products?
- Can a behavioral model be used to incent savings?
If the question of whether or not credit can incent savings remains unanswered, then so is the question of how this model might have been mimicked by others. Tandem Money was unique because it used two banks. The line of credit and savings account was issued by Premier Bank (Rock Valley Bank, Iowa) but the card itself was issued by Urban Trust Bank.
No one knows what kind of products might have followed Tandem in using the two issuer model, but it is safe to say that many people were as worried as much by that unknown as they were by Tandem itself.
This presented a scenario which had not been contemplated by regulators when they wrote the Electronic Funds Transfer Act. Of concern here was the chance that someone - be it TM or someone else - would integrate a line of credit in one bank to one at another institution and then use that to deposit a federal benefits payment. It is illegal (I am not a lawyer so I may be off a bit here) to put a federal benefits payment on to an account which has a mandatory debt collection device. There has been modification to EFTA to address this for now.
It also presaged the chance that someone else would use the idea to put a high-cost payday product into the hands of customers across the country. It would be hard to argue that anything with Tandem resembled payday, but it would be easy to see that someone else might try to take the dual issuer model for a high-cost payday spin.
A Slow Path to Savings and Borrowing
Few people would say that underwriting to a prepaid customer has much in common with the means utilized at mainstream banks for credit decisions on products like mortgages and auto loans. Credit score data - if available - is rarely collected.
TM chose to develop a relationship as a pretext to decisioning. It took some time before the line of credit was even available. Once it was, the borrower had to repay their advance and then restore their prior savings. Moreover, the structure put up a hurdle against taking out credit. A person had to make an arrangement to get credit prior to spending.
In spite of its demise, the ideas within TM deserve another look
We know that behavioral economics can explain consumer behavior that might otherwise seem illogical, but TM was one of the first to transform those lessons in to a working product.
The lack of savings among so many low-income households predetermines outcomes in other elements of their lives. Literature on asset building tells us that households with savings are better able to withstand shocks and more likely to raise children that graduate from college.
No one has much to disagree with the value of savings, of course. It is the question of putting credit into the hands of people at the margins that provokes so much disagreement, and it was the capacity of TM to do so which most certainly led to its downfall.
Credit is a poor substitute to savings for surviving a financial shock. The oft-heard defense of credit inevitably touches upon those shocks - most often it seems of the sudden car repair - but it may be a need that has to be resolved in a better way.