Checking Account Lite?

By Whaley, Cary | Independent Banker, April 2011 | Go to article overview

Checking Account Lite?


Whaley, Cary, Independent Banker


Looking into bank-issued prepaid cards

For some reason, thinking about the future of bankissued prepaid cards reminds me of the pink, blue and yellow packets of artificial sweetener.

Unfortunately and unwisely, regulators are aiming to trim fat margins-hence increased regulation to severely curtail interchange and overdraft revenue on debit cards. Meanwhile, issuers are scrambling to serve up options- prepaid being one of them-that won't sour consumers on checking accounts or implode bankers' bottom lines. (First Annapolis Group, a payments consulting firm in Annapolis, Md., estimates that the debit interchange pricecap provisions of the Wall Street Reform Act could reduce banking industry revenue by $10 billion a year.)

The expected debit card revenue reduction comes at an inopportune time, when banks are already strategizing ways to recoup the estimated $500 million to $600 million in lost revenue associated with recent amendments to Regulation E as well as comply with the recent FDIC guidance on overdraft payment programs. Community banks, while traditionally not as aggressive as larger banks in terms of maximizing overdraft income, will still feel the pinch.

Will community banks look for an account substitute? Put another way, could basic account services be conducted in a way that minimizes risk but preserves a sweet revenue stream? Could this substitute be offered to consumers who might not qualify for a traditional checking account?

Enter prepaid cards, which were exempted the from Wall Street Reform Act interchange provisions and for which traditional interchange rates could still apply (depending on interchange pricing by the card networks). Either way, prepaid could be a viable alternative.

Many bank-issued general-purpose prepaid cards are eligible to receive direct deposit of payroll or benefits. In fact, a recent interim rule by the U.S. Treasury Financial Management Service would permit federal agencies to send federal payments via direct deposit to prepaid cards, providing the funds are insured and the card provides the same consumer protections that apply to payroll cards under Regulation E.

Plus, the risk is lower because the card is the only way to access the funds. Cardholders do not have to worry about bounced checks because there are no checks. And while there is still a possibility of overdrafting a prepaid card, that risk can be mitigated by not allowing pay at the pump, car rental or hotel use.

To Rick Gillett, CEO of Sutton Bank in Attica, Ohio, prepaid cards are an integral part of his overall strategy. …

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