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Forbes.com
/ Financial Services
Another Shade Of Plastic
Liz Moyer, 05.08.06, 12:55 PM ET
NEW YORK -
Along with the exploding popularity of gift, payroll and other stored
value cards comes another form of plastic--the pre-paid debit
card--that marketers hope will appeal to the estimated 80 million or so
people in the U.S. who lack basic banking accounts.
The cards look like credit cards but act like debit cards, and can
substitute for cash for everyday purchases such as groceries, small
consumer goods, restaurant tabs and gasoline. Proponents of pre-paid
cards say they are safer and more convenient for consumers than
carrying cash around, and the costs are lower than check-cashing and
payday lending outlets. They are also accessible to those with no or
very poor credit histories.
An estimated $117 billion of purchases will be made this year using
pre-paid plastic, whether that be in the form of a gift card, a payroll
card or a renewable debit card issued under the Mastercard
or Visa logos. Mastercard projects that
by the end of 2009, pre-paid and stored value card transactions could
soar to $257 billion.
But regulators and law enforcement officials have raised concerns about
the potential for abuse. Look no further than the Federal Emergency
Management Agency's disastrous distribution of $2,000 in relief aid on
pre-paid debit cards to victims of Hurricane Katrina. The Government
Accountability Office, an investigatory arm of Congress, released a
report in February outlining massive fraud in the program.
There are gaps in the laws offering safeguards and other consumer
protections. The Federal Reserve is expected to have some sort of
policy pronouncement on that issue this summer. Earlier this year, law
enforcement officials raised concerns about the cards' use in
circumventing anti-money laundering rules.
"There is a patchwork out there right now," says Kurt Helwig, the
executive director of the Electronic Funds Transfer Association, a
lobbying group for the cards industry. "We are seeking greater
clarity."
The reloadable debit cards are issued by banks but sold by companies
such as Blackhawk, a unit of the Safeway
(nyse: SWY
- news
- people
) grocery chain, NetSpend and GreenDot
Financial through ordinary retail outlets. Consumers
pay an activation fee, monthly service fees, and in most cases, fees to
withdraw cash using the cards at automated teller machines. Some other
companies, such as ECount, sell their cards to consumers through
corporations, which use them for incentive or rewards programs or for
payroll deposits.
The marketers say one aim of the products is to boost financial
literacy among the "unbanked," many of whom live at or below the
poverty line and who tend to fall outside the radar screen of bank
marketing programs. Some 13% of American families have no bank account,
according to the FDIC. NetSpend's chief executive, Rick
Savard, says his company's cards, which look like
platinum or gold credit cards, can teach consumers how to budget as
well as bring them into the mainstream. "There is an aspirational
component" to the cards, he says.
The market is so big that Visa is preparing to roll out a nationwide
network of retail spots where consumers can reload cash onto their
Visa-branded pre-paid cards. Visa says it is specifically going after
the millions of "unbanked" consumers in the U.S., a segment it
estimates earns $1 trillion in annual income and pays $1.5 billion of
that annually in check-cashing fees. These fees may be avoided by
workers having their employers deposit their salaries directly into the
debit cards.
GreenDot Financial, a privately held Monrovia, Calif., company, set up
a network of reload stations last year in more than 35,000 pharmacy,
grocery and electronics retailing stores. In New York City, for
example, GreenDot card holders can renew their cards at CVS
(nyse: CVS
- news -
people )
pharmacies or Radio Shack (nyse: RSH
- news -
people
) stores.
Pre-paid cards are certainly less costly to the bank industry in terms
of reducing the number of paper checks processed. It costs over $1 to
process paper checks, while just one-fifth of that to process an
electronic funds transfer, according to Dennis Moroney, a consultant at
TowerGroup. Pre-paid debit cards are also a way for banks to begin to
build a customer history with people they might never have gotten in
contact with.
"They do have value as an entry-level product," Moroney says.
The cards are another iteration of services that banks have been
pushing out for several years. Bank of America
(nyse: BAC - news -
people
), Wells Fargo
(nyse: WFC
- news - people )
and Citigroup (nyse: C
- news -
people
) have set up free or cut-rate foreign
money transfer services, appealing especially to the millions of
undocumented Mexican immigrants who are afraid to open bank accounts in
the U.S. but need a way to wire money home to family still living in
Mexico.
Pre-paid debit card marketers are also going after the Hispanic market.
GreenDot has a Spanish language program, and NetSpend is about to
introduce one.
The New York State Banking Department, which has kept a close watch on
the proliferation of check-cashing and payday lending retail stores in
New York City, reviews pre-paid debit and other products brought to its
attention. It doesn't have an opinion on the products, yet, but "we are
definitely keeping an eye on it," said a spokeswoman.
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