I think it is fair to say that while innovation is a prepaid buzzword - most recently to lend support for a plan to shield prepaid products defined as such from regulatory scrutiny - it is time to push back with a critical framework for gauging new ideas.
I like to see innovation provided that it provides value to consumers. This week, there is a new development in payments that merits attention.
True, this is not a prepaid product, but it is within the payments sphere. It is a cash-based payment network known as Dwolla.
Like a PayPal, Dwolla lets people pay without going through a bank. Unlike PayPal, transactions with Dwolla are vitrually free for a merchant. Currently, Dwolla is taking a quarter in any instance where the ticket price is ten dollars or greater.
Dwolla hopes that this will help with adoption at stores. An unknown is the extent to which that costing will be shared among consumers. On their website, Dwolla conjectures that merchants will create a standard price and then a "Dwolla price."
There are some other perks - Dwolla believes that it will offer more security - but the key to me is the idea that lower merchant fees could bring lower purchase prices for consumers. Right now, the main hitch is finding a retailer in the Dwolla network. I am yet to see one in North Carolina, but I imagine that this kind of thing will find early pickup in tech-savvy places like California.
I do see a problem with payment processing: Dwolla says payments will process in two to four days. Some merchants may be put off by that kind of delay.
The background on innovation
I believe that prepaid is itself an innovation. To an extent, prepaid is the most significant innovation in the payments space. Certainly, evidence out in the world underscores the dynamic growth in consumer interest for these cards. Some of that could be due to convenience, but undoubtedly one value is for those consumers that would otherwise be shut out of the payments system. Banks do grade new customers and many, perhaps because of their placement in a ChexSystems registry, are not invited to the branch bank dance. The innovation of prepaid gives those people another ticket.
Implicit in that ability is that consumers do not need to be credit-qualified, it makes little sense that a new innovation would seek to filter many out of the sector and back into a credit card. That is what companies are trying to do with overdraft and credit. I think regulators, both because of safety and soundness concerns but also because of consumer protection issues, are on to that game and very skeptical to its expansion.