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Could Free Upfront Pricing on Prepaid Herald Back End Costs?

Adam Rust's picture

Posted June 13, 2014

In spite of the fact that the industry has seen price compression for the last two years, prepaid card program managers and issuers have found it difficult to shake a perception held by the public that their cards are expensive.

Here is the messaging problem: the oft-heard question about the product is “aren’t those cards loaded with fees?”

Next most often: “those are not bank accounts.”

For now, that is mainly a problem that impacts the people who manage the messaging for prepaid cards. But long-term, it could impact product transparency.

The story begins with Wal-Mart. Ever since it created its Money Card, Sam’s Way has put downward pressure on prices. Then AMEX made things even worse. It is hard to spend any money to own an AMEX card. This, it is now the rule that anyone account holder who has set up a recurring direct deposit will have no maintenance fee and little in the way of transaction costs. The costs are so low that Green Dot has even go so far as to argue that AMEX is losing money. Then pricing got even lower when a number of retailers dropped their exclusive contracts. Going forward, pricing could drop even further once cross-subsidizers seize on prepaid as a way to help with their collections.

Here’s the thing: value can trump price.

“If we are only trying to say that we are better than a check cashing,” said Bancorp’s Jeremy Kuiper, “then that is a low bar. I was flummoxed when I heard someone say that. That cannot be the bar. It has to be much more value than that.

Race-to-the-bottom

The gap between perception about cost and reality is substantial, and unless this conception is addressed, the “lots of high fees” image will only grow in its degree of disconnection from market reality.

Pricing compression comes as the cards are doing more. Remote deposit is becoming a standard feature. Some cards now offer discounted prices on the purchase of prepaid cell phone minutes. Some offer pre-cleared checks.

Free isn’t always free. Free isn’t always transparent.

Free checking was not free. In fact, hindsight shows that free turned out to be a complete falsehood. The whole model of free checking was based upon the expectation that overdraft revenues would more than make up for the lack of monthly maintenance fees. Implicit in that product was a systemic disconnect between disclosures and actual experience. It was the same story with zero-interest promotional rates on credit cards. All too often, customers ended up paying accrued interest when they had a balance at the end of the promotional period. Free is fuzzy.

Panelists at this morning’s Power of Prepaid conference spent some time talking about the implications of a race-to-the-bottom on pricing. 

Prepaid is a low margin business at best. It is also plagued by the high share of customers who are unprofitable.

“I was at Providian when zero came out,” said Blackhawk’s Anu Shultes, “so I understand what you were saying. But think about T-Mobile, it is not really free. You are wrapping this product into a service that is not free. We all know that it is not free [to provide], it is an expensive channel. When I went from mainstream to prepaid, I had to get used to the fact that the margins are not the same. There is no 13 percent rate with 6 percent cost of funds. These are all margins that are pennies on the dollar.”

All of this should give consumer advocates something to think about. I think it is a legitimate concern that an era of free could herald the arrival of more prepaid cards with overdraft.

For years, Green Dot has been vocal about their institutional sentiment against the idea of overdraft. It is a place where they have differentiated with their largest competitor.

“We do find that people are willing to pay for value,” reiterated Green Dot's Kostas Sgoutas, “we are proud of not having overdraft and penalty fees. We are very upfront about fee disclosures. We do feel that it is focusing on value.”

But there are people who feel differently. If the CFPB approves overdraft, then the interaction with such a rule-making to an industry faced with significant pricing problems could be dramatic. 

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