Table of Contents
The dynamics of the card‐issuing business — and, in turn, those of the banking industry — have changed dramatically in recent years as an array of economic, regulatory, and governmental factors and initiatives have combined to drive expansion in the use of prepaid instruments as well as continued evolution in the payments business. This has led financial institutions to seek new ways to achieve profitability, encompassing alternatives such as product restructuring, staff downsizing, and innovations to traditional products and delivery. Two critical areas that have been directly affected include card issuing and the demand deposit account (DDA) relationship. This report evaluates selected prepaid products in the market today to determine how fees for bank prepaid products compare to
those of non‐bank prepaid products and also to compare prepaid fees to those of basic checking accounts.
- What factors are encouraging the expansion of prepaid products in the U.S. market?
- How do fees of bank prepaid cards compare with those offered by non‐bank providers?
- Does prepaid augment banks’ product lines or detract from traditional checking products?
- How are bank prepaid products positioned with key demographic segments?
- How competitively priced are prepaid cards when compared with basic checking account services?
- What regulatory factors influence the prepaid market?
To prepare this report, Javelin incorporated both primary consumer survey research and secondary research drawn from financial institution and prepaid provider sites. The consumer surveys used for this report are as follows:
- A survey collected online by Javelin in October 2012 from a random‐sample panel of 3,217 consumers. The survey targeted respondents based on proportions of gender, age, and income representative of those of the overall U.S. population. The overall margin of sampling error is ±1.73% at the 95% confidence level.
- A survey collected online by Javelin in March 2013 from a random‐sample panel of 5,534 consumers. The survey targeted respondents based on proportions of gender, age, and income representative of those of the overall U.S. population. The overall margin of sampling error is ±1.32% at the 95% confidence level.
- A survey collected online by Javelin in October 2011 from a random‐sample panel of 3,210 consumers. The survey targeted respondents based on proportions of gender, age, and income representative of those of the overall U.S. population. The overall margin of sampling error is ±1.73% at the 95% confidence level.
In addition, Javelin reviewed product and fee information from the following prepaid and checking account providers:
The methodology for Javelin’s 2012 review of bank checking account fees is addressed in our report, Coping with Regulation: The Necessity of Bank Fees, Javelin Strategy & Research, February 2012.
From an estimated $150 billion this year, prepaid purchase volume is expected to grow by almost $45 billion over the next five years, a compound annual growth rate of 5.66%. Between 2009 and 2012 consumer ownership of prepaid cards climbed 71%. Prepaid products are now used by 13% of the U.S. adult population, and specific population segments show adoption rates significantly above that of the overall population. Similarly, prepaid spending is greater in some population groups: Javelin finds the underbanked spend an average $75.12 at merchant locations using a prepaid option, while all prepaid consumers spend an average of $37.77.
Like banks themselves, prepaid cards are often maligned for their high fees, but new products prove otherwise. Recently introduced prepaid products like Chase Liquid and the Bluebird Card by American Express and Walmart are countering that negative image with tightly structured fees designed to limit consumer costs. Bluebird has the cleanest and most minimal fee structure, and Chase Liquid offers a strong model of fee transparency. Increasing competition in the provision of account services through new products, providers, and account structures will continue to place pressure on the prices providers can charge.
Bank prepaid products are generally a lower fee option for consumers than basic checking and often more cost‐effective when compared to many non‐bank prepaid products. Banks are offering an effective array of price points at which consumers can choose payment account products, giving institutions a strong alternative to offer underserved or budget‐conscious populations. In a baseline scenario comparison combining monthly fees and ATM access charges, the top retail bank checking account products charge an average of $8.84 per month, while the bank prepaid product average is just $6.89 a month. The non‐bank prepaid average is most costly at $11.02 per month, although newer options — like Bluebird — may be much more cost‐effective.
Banks may find the optimal prepaid customer within their own walls as existing, underperforming checking account holders. Despite the newer opt‐in rules, overdraft behavior is most likely to make checking accounts too expensive for some consumers, and prepaid options enable banks to retain customers in a manner that is more satisfactory and cost‐effective for both parties. All of the top 10 retail bank checking products — with the exception of Capital One, which charges interest on the amount of an overdraft — charge an overdraft penalty of more than $30. The beauty of the prepaid card is that an overdraft is not possible and decline fees are generally minimal or nonexistent, ranging from $0.95 to $2 among reviewed prepaid products.
Recurring, account‐based use of a prepaid card builds transaction interchange revenue, which is estimated by Javelin at $1.5 billion this year. Transaction growth is also a primary reason for providers to encourage direct deposit reloads. Direct deposits encourage loyalty and promote the use of prepaid products as primary transaction vehicles. Consumers are increasingly using prepaid cards for a wide array of purchases and for paying bills, such as utilities (25%) and rent (13%).
The fractured prepaid market is likely to see continued consolidation as providers vertically integrate to improve their product sets, increase scale, and reduce costs. A rash of recent acquisitions in the prepaid field is changing the competitive landscape and will also substantively contribute to price compression.
Even as the electronic conversion of federal government payments is expected to spur adoption of the government’s prepaid card program, Direct Express,2 an array of legal and regulatory actions will continue to influence a changing environment for prepaid delivery. As of March 1, 2013, all individuals receiving government benefits by paper check were required to switch to direct deposit delivery. Proposed regulations or legal actions from the Consumer Financial Protection Bureau (CFPB), the Financial Crimes Enforcement Network (FinCEN), and a variety of states will continue to affect competitive dynamics as prepaid becomes increasingly mainstream.
PREPAID REACHES ITS PRIME
A host of economic, regulatory, and governmental factors and initiatives have recently combined to drive expansion in the use of prepaid instruments as well as continued evolution in the payments business. As of March 1, 2013, the federal government retired the use of paper checks for benefits and embraced direct deposit instead. This electronic conversion of payments to benefits recipients is expected to spur further adoption of the government’s prepaid card program, Direct Express.3 A rash of recent acquisitions in the prepaid field is also changing the competitive landscape as the integration of players increases market efficiencies and generates scale. Further, regulatory changes like the Durbin Amendment and the Credit Card Accountability, Responsibility and Disclosure (CARD) Act are changing the revenue dynamics of banks in their businesses as checking account holders and card issuers, while proposed regulations from the Consumer Financial Protection Bureau (CFPB) and the Financial Crimes Enforcement Network (FinCEN) will continue to influence prepaid delivery in this changing environment. (See sidebar on Page 13 about proposed prepaid market regulation.) In addition, consumers increased their use of prepaid vehicles during the recent recession as they become more cautious and access to credit tightened. From 2009 to 2012 consumer ownership of prepaid cards climbed 71% while specific population segments show adoption at rates significantly above that of the overall population. (Refer to Figure 1.)
Gen Y.2 Consumers — Ages 25 to 34 — Are Most Likely to Have a Prepaid Card
Figure 1: Percentage of Prepaid Cardholders, by Specific Demographic Groups
These factors herald a coming of age for prepaid. No longer a single‐use and infrequently considered payment option, prepaid is beginning to reveal its capabilities as both a payment and account tool and as a flexible option that serves the needs of multiple potential constituencies. In addition to its use for federal government benefits distribution, 41 states and the District of Columbia use prepaid cards to distribute unemployment benefits and some states are also using prepaid products to deliver tax refunds, according to the National Consumer Law Center.4 At the same time, many card providers and even major tax preparers are encouraging taxpayers to receive their federal tax refunds on prepaid cards. H&R Block, the nation’s largest consumer tax services provider,5 is also the fourth‐largest provider of a prepaid product, the Emerald Card. (Refer to Figure 2.) Using the draw of receiving a tax refund to the card as an initial value load, the Emerald Card includes bill payment and alerts functionality and can be linked to more extensive financial services, including a savings account, a short‐term loan product, or a secured credit card.6 Reloadability has also helped define prepaid as account‐like in nature. Javelin’s research indicates that today, 64% of consumers using prepaid products carry a reloadable card, and the number of individuals reloading these cards through direct deposit is expanding rapidly. As an example, a leading program manager, NetSpend, reports that at year‐end 2009, 27.6% of its portfolio of active cards was reloaded through direct deposit, while 46% of cards used this option by the end of 2012,7 an increase of 67%.
Many of the Top‐Ranked Prepaid Issuers Provide Services to Non‐Bank Prepaid Providers
Figure 2: Top 20 Prepaid Issuers, 2011
EXPANSION OF BANK PREPAID OFFERINGS
As noted, the dynamics of the card‐issuing business — and, in turn, those of the banking industry — have changed dramatically in recent years as legislation such as the CARD Act, the Dodd‐Frank Act, and revisions to Regulation E have been put in place. (Refer to Appendix Figure 19 for an overview of some of these regulations.) Compliance costs have risen as revenues have been restricted and the balance of fee income within product silos has been upset. This has led financial institutions to seek new ways to achieve profitability, encompassing alternatives such as product restructuring, staff downsizing, and innovations to traditional products and delivery. Two critical areas that have been directly affected include card issuing and the demand deposit account (DDA) relationship. The Durbin Amendment and debit‐focused changes to Regulation E have affected both with a cumulative estimated $12.2 billion annual blow to bank revenue.16 Some closely related changes that are in part designed to address these revenue implications include the return of direct monthly fees for checking account services and the introduction of an increasing number of bank‐specific prepaid products. The addition of bank‐driven prepaid options also positions FIs more aggressively against the many non‐bank prepaid products in the market and gives institutions a product set to offer underserved populations, including the underbanked and youth markets. And, as noted in recent releases about the Walmart‐American Express Bluebird card, prepaid also can meet the needs of the “unhappily banked,” which — based on recent Javelin research — represents about 5% of consumers who are very dissatisfied or somewhat dissatisfied with their primary bank and may, as a result, be receptive to new options that support their financial services needs. (Refer to Figure 3.)
Most Consumers Are Satisfied with Their Primary Bank, But a Small Percentage Are at Risk
Figure 3: Consumer Satisfaction with the Primary Bank Used
Banks also indicate other reasons to introduce prepaid products. A recent FDIC study found that about 1 million American households left the traditional banking system between 2009 and 2011.17 Accordingly, Javelin measures the underbanked market at 37 million adults, or 15% of the U.S. adult population, who lack a traditional checking account. During the recessionary period, many consumers also experienced credit issues that made it more difficult to qualify for traditional checking accounts; prepaid products provide a “turn down” option for banks to offer these prospects. By establishing a relationship, FIs have the opportunity to transition customers to a more extensive banking relationship. Regions Financial, for example, has had about 9% of its prepaid and check‐cashing customers open traditional checking accounts.18 Prepaid options can also be provided at a lower cost; Chase estimates it costs 40% less to serve Chase Liquid prepaid card customers than customers who have checking accounts.19 In a similar vein, in November 2012, U.S. Bank announced its acquisition of FSV Payment Systems, a leading prepaid card program manager and processor.20 This acquisition will allow U.S. Bank to internally manage all aspects of prepaid card issuance and, correspondingly, reap both scale and cost benefits.
Like banks themselves, prepaid cards are often maligned for their high fees. Further, similar to the checking account product, the fees that are assessed to a prepaid user can vary significantly in structure and magnitude depending on the account type and the user’s behavior. Recently introduced products like Chase Liquid and the Bluebird card are trying to counter the negative image with tightly structured fees designed to limit consumer costs. Chase claims, “Chase Liquid is a low‐cost alternative to traditional checking accounts and its convenience and pricing transparency sets a new standard for prepaid products,”21 while an executive from American Express similarly stated, “Bluebird is designed to help make [consumers’] everyday financial lives easier, more convenient and less expensive.”22 This report evaluates some of the prepaid products in the market today to determine how fees for bank prepaid products compare to those of non‐bank prepaid products and also to compare prepaid fees to those of basic checking accounts.
PREPAID FEES: BANK VS. NON‐BANK CARDS
To gather insight regarding prepaid fees, Javelin reviewed the consumer fee structures of five bank‐specific prepaid card products and five non‐bank cards. The products Javelin reviewed that are marketed directly by their bank issuers include the BB&T MoneyAccount, Chase Liquid, PNC’s SmartAccess Card, the Regions Now Card, and the U.S. Bank Convenient Cash Card. The non‐bank prepaid products reviewed include the AccountNow Gold Card, Bluebird by American Express and Walmart, the Kaiku Visa Prepaid Card, the NetSpend FeeAdvantage Card, and the Plastyc UPside Visa Prepaid Card. Comparing the fees for these 10 products shows the bank prepaid cards to be slightly less costly than the non‐bank prepaid cards, with an average monthly fee of $4.59 vs. $5.36, respectively (refer to Figure 13). Each of the banks reviewed charges a monthly fee, ranging from $3 to $5. Among the five nonbank prepaid products, Bluebird stands out as the only card that does not charge a monthly fee, while per‐month charges of the other cards rise as high as $9.95 a month.
However, for prepaid products, as well as checking accounts, the monthly fee — if any — is rarely the only associated charge. Looking beyond the basics, Javelin used an analysis that compares a baseline transaction scenario for each of the products reviewed. The baseline scenario — Scenario 1 — shows the calculation of the expected cost to a prepaid cardholder for each of the bank and non ‐bank prepaid cards reviewed given a monthly account fee, two innetwork ATM transactions, and one non‐network ATM transaction per month.
As Figure 4 shows, ATM transaction fees drive the overall cost up quickly for some of the non‐banks that do not offer customer access through a specific ATM network.
Free ATM Network Access Can Make a Big Difference in the Monthly Costs Incurred by Prepaid Users
Figure 4: Monthly Scenario 1 Account Fees for Selected Prepaid Accounts
The overall Scenario 1 average for the five non‐bank prepaid cards reviewed is $11.02, while the cost for both the AccountNow Gold Card and the NetSpend FeeAdvantage customer would be at least $17.45 per month. Notably, these costs represent only the charges imposed by the card provider; in out‐of‐network ATM transactions the ATM owner also typically charges a surcharge of $0.45 to $5 per transaction and averaged $2.10 in 2012.23 Users of non‐bank prepaid cards that do not offer ATM access would therefore incur an additional cost of $6.30 for the three ATM transactions conducted under Scenario 1. In comparison, bank cards offer free in‐network ATM access, which holds Scenario 1 charges at a more reasonable average of $6.89 per month. In addition, Regions waives and BB&T, NetSpend and UPside reduce the monthly base fee when the cardholder directly deposits a specified dollar amount or more to the prepaid account. A recent study released by the Federal Reserve of Philadelphia found that direct deposit to a prepaid product account is associated with lengthened card life, increased use for transactional purposes, and higher revenue to the issuer.24
Comparatively, there is little change in the costs incurred by either bank or non‐bank prepaid users when they reach the point of insufficient funds in their account. Unlike checking accounts that may incur high overdraft penalties (refer to Figure 16 on Page 30), the beauty of the prepaid card is that an overdraft is not possible and decline fees are generally minimal or nonexistent, ranging from $0.95 to $2 among reviewed prepaid products. Figure 5 shows the addition of decline fees to the baseline scenario; this is highlighted as Scenario 3, which includes the same activity described in Scenario 1 (a monthly account fee, two in‐network ATM transactions, and one non‐network ATM transaction per month) plus any stated overdraft or decline penalty.
The Nature of Prepaid Products Controls the Potential Consumer Cost of Insufficient Funds
Figure 5: Monthly Scenario 3 Account Fees for Selected Prepaid Accounts.
The nature of prepaid also means that GPR cards can be reloaded and that there might be a fee to do so. Bank cards generally do not charge a fee to reload at an in‐network ATM or at a bank branch. (See Appendix figures 20 and 21 illustrating consumer reload activity.) In addition, none of the bank or non‐bank providers charges for direct deposit. A few of the non‐bank providers charge for fund transfers from a debit or credit card, and these fees range from $2 to $2.95 per transfer. Consumers can also choose to reload at a retailer or merchant location, and costs for these services typically range to no more than the $4.95 GreenDot MoneyPak fee.25
Beyond these basic components, prepaid providers commonly charge customers for numerous other features. Among the 10 prepaid products reviewed, six have some form of fee for customer ‐service options via teller, interactive voice response (IVR), or a call to a customer‐service representative. These fees are typically in the lower dollar ranges, although U.S. Bank charges $3 for a teller withdrawal, while the Kaiku Visa Prepaid charges $4.95 and AccountNow Gold assess customers $15 for the teller withdrawal privilege. Seven providers charge for paper statements; these fees range from $1 to $5.95. As Figure 6 shows, most providers also charge a card‐replacement fee, although, notably, neither Chase Liquid nor Bluebird does. Chase Liquid does, however, charge for expediting a replacement card, but — at $5 — its fee for this service is well below the average of $25.
Only Bluebird and Chase Liquid Do Not Charge a Card‐Replacement Fee
Figure 6: Card‐Replacement Fees for Selected Prepaid Products
For most of the prepaid products reviewed, the fees don’t stop at this point. Overall, Bluebird has the cleanest and most minimal fee structure (see Figure 7);
Among Reviewed Prepaid Options, Bluebird Carries the Most Minimal Fee Structure
Figure 7: Fee Overview from Bluebird by American Express and Walmart
however, the product is new and evolving, so additional fees may yet be on the horizon. For example, Bluebird is the only prepaid product of those reviewed to explicitly state that it charges no foreign exchange fees; all other providers charge a flat fee and/or a percentage of the transaction value for withdrawals at international ATMs and/or for international purchases. Notably as well, Bluebird does not today allow cash back at the point of sale, which limits cardholders’ cash withdrawal options and could result in related fees. Other fees charged by providers are common to those charged with traditional checking accounts, including charges for return deposited items, cash advances, and cashier’s checks or money orders. One interesting fee, for legal processing, is noted by Chase Liquid and can range up to $75 for handling a court’s administrative orders such as for a garnishment or a tax levy.
TRANSACTION ACTIVITY AND INTERCHANGE
From a revenue perspective, and beyond fee income, prepaid transactions also yield interchange to their issuers. Prepaid purchase volume is expected to grow by almost $45 billion over the next five years, a compound annual growth rate of 5.66%. (Refer to Figure 8.)
U.S. Consumers’ Prepaid Purchases Will Reach an Estimated $150 Billion in 2013
Figure 8: Actual and Forecast Retail Prepaid Purchase Volume, 2012–2017
Despite the growth in purchasing, prepaid interchange income will vary depending on whether the card and the issuer are subject to the Durbin Amendment. Notably, issuers with assets of $10 billion or less are exempt from Durbin’s interchange restrictions, as are specific types of prepaid products. Assuming an overall industry interchange rate of 1%, Javelin estimates an industry interchange yield of $1.5 billion based on the prepaid spending estimates forecast for 2013.
This transaction revenue yield is another reason for providers to encourage recurring, account‐based use of a prepaid card reloaded by direct deposits. The direct deposit encourages stickiness and also can build use of the prepaid product as the primary transaction vehicle. Figure 9 shows that consumers are using prepaid cards for a wide array of purchases and increasingly using the cards to pay bills, such as for utilities (25%) or rent (13%). Prepaid spending is also higher in some populations: Javelin finds the underbanked spend an average $75.12 at merchant locations using a prepaid option, while other prepaid users spend an average $37.77 per in‐store purchase. (Refer to Appendix Figure 22.)
Prepaid is Most Commonly Used for Online and Grocery Purchases
Figure 9: Most Common Prepaid Purchases, by Underbanked, Y.1, Y.2, and All Prepaid Owners
POSITIONING PREPAID THROUGH BANKS
Although banks may be actively entering the prepaid business, they still have a way to go to successfully position themselves with their target market. As Figure 10
Prepaid Users in Gen Y are Being Increasingly Approached by Banks
Figure 10: Percentage of Prepaid Owners Who Have Been Offered a Prepaid Card by a Bank, 2011–2012
highlights, a third of prepaid cardholders have been offered a prepaid card by a bank. During the past year, the share of Gen Y (ages 18–34) prepaid users who have been offered a prepaid product by a bank has climbed significantly from 17% to 36% in 2012, but the percentage of the underbanked population of cardholders that were approached by a bank with an offer of a prepaid product has remained relatively static.
Consumers Typically Obtain Their Most Used Prepaid Product From a Merchant or Retailer
Figure 11: Provider of Most Frequently Used Prepaid Card by Gen Y, Gen X, Underbanked, and All Prepaid Owners
As noted in Figure 11, most underbanked cardholders obtain their most used prepaid product from a merchant or retailer and secondarily look to banks as sources for their cards. Underbanked cardholders also note that their employers were not likely to have offered them the prepaid card they use most often. Payroll and benefits cards are two types of prepaid cards that readily meet the needs of the underbanked. When positioned as a bank service, an FI can meet business and consumer needs, enhancing relationships with each group. Similar to the underbanked population, prepaid product users in Gen X are also most likely to use a card from a retailer or merchant, while bank delivery of prepaid to Gen Y cardholders fares equally as well as cards obtained from merchants or retailers.
From a fee standpoint, the bank prepaid products reviewed in this report are actually quite competitive with the non‐bank products. Banks may simply need to raise the visibility of their prepaid options. Again, a look at Bluebird shows a card that has leveraged social media, broad scale television advertising, and the 4,500‐ location footprint of Walmart stores, including checkout register and “power alley” (e.g., the main access route into the store) placement.26 In positioning prepaid products, institutions might also consider the evolution of media and channels. As an example, PayPal recently partnered with LG for smart TV, Magneto for mobile point‐of‐sale (mPOS) applications, and it acquired Iron Pearl to help it extend social and viral development on the Internet.27 Another approach is illustrated by Regions’ Now Banking product suite (see Figure 12).
Regions Promotes Now Card as a Banking Solution
Figure 12: Regions Financial Now Banking Prepaid Page
Rather than positioning the prepaid option as a card or as a payment option only, Regions highlights Now — along with checking products — as a banking solution. The prepaid card has linked savings, short‐term loan, bill payment, and funds transfer services available to users. This is in line with — and in fact preceded —the approach that Bluebird uses, supporting the identified need of some consumers for alternatives to traditional checking account services. Finally, banks may also find the optimal prepaid customer within their own walls as an existing, underperforming checking account client. Rather than losing customers like these, segmentation analysis might be employed to help banks develop a strategy to transition these customers to a more profitable and effective relationship.
CHECKING FEES: CHECKING VS. PREPAID PRODUCTS
The re‐emergence of checking account fees is one of many factors encouraging a growth in prepaid offerings. But, from a pricing standpoint, how truly competitive are prepaid cards when compared with basic checking account services? Javelin first looked at bank fees in 2012, and our report, “Coping with Regulation: The Necessity of Bank Fees” (Javelin Strategy & Research, February 2012), found the top 10 retail banks charging an average fee of $5.88 per month for basic checking account services. (Refer to Appendix Figure 23.) Two banks, PNC and Ally Bank, offered basic checking free of any base monthly fee in that year, and PNC continues to do so again in 2013, now joined by Capital One’s 360 Checking, which has no monthly fee. The 10 banks, as ranked by deposit size, and basic checking products that are reviewed in this 2013 report include: Chase Total Checking, Bank of America eBanking Checking, Wells Fargo Value Checking, Citi Basic Checking, U.S. Bank Easy Checking, Capital One 360 Checking, PNC Free Checking, TD Bank TD Simple, BB&T Bright Banking, and SunTrust EZ Checking.28 In 2013, the average monthly fee charged by these top 10 banks for basic checking services has climbed nearly $1 from the 2012 average to $6.79. Although this increase is substantive, it warrants note that the mix of banks and bank products is somewhat different this year than last, so the change in average fees does not mean that all banks have introduced fee increases. In fact, Capital One, which was reviewed in both years, introduced its new 360 interest earning checking account with no monthly fee in February 2013.29 Nevertheless, as Figure 13 shows, when comparing checking accounts to bank and non‐bank prepaid alternatives, banks appear to be offering an effective array of price points at which consumers can choose payment account products. Fees charged by non‐bank providers are the most variable, with the Bluebird card not charging a monthly base fee, and other monthly fees, for AccountNow Gold and NetSpend FeeAdvantage, ranging to $9.95 a month.
Bank Checking and Prepaid Products Offer a Range of Consumer Price Points
Figure 13: Comparative Base Monthly Fee Average for Top 10 Banks and Selected Bank Prepaid and Non‐Bank Prepaid Accounts
Note that the top 10 banks included in Javelin’s 2012 report were ranked based on assets, rather than deposits, resulting in the inclusion in 2012 of HSBC and Ally Bank rather than BB&T and SunTrust, which are included in 2013’s ranking of retail banks based on deposits.
Also similar to prepaid options, basic checking account products often encourage direct deposits. This reduces the cost to service the account while enhancing loyalty and regular use of the account for transactions. Of the 10 accounts reviewed, half allow the base monthly fee to be waived with the use of direct deposit (although some apply caveats to the amount deposited) or with an average monthly balance of $1,500. Only one of the bank accounts, TD Simple, has no provision for eliminating the monthly fee, although at $3.99 per month, or $2.99 with online statements, its monthly charge is already quite minimal.
When a basic usage scenario is applied to the checking products reviewed, the range of costs incurred changes only slightly. Again, Javelin used a baseline transaction scenario — Scenario 1 — that shows the calculation of the expected cost to a checking account holder given a monthly account fee, two in‐network ATM transactions, and one non‐network ATM transaction per month. None of the banks reviewed charges an in‐network ATM access fee, while all except Capital One’s 360 Checking charge a fee for an out‐of‐network ATM transaction. These result in Scenario 1 charges that range from zero at Capital One to $14 per month at Chase. (Refer to Figure 14.)
Among the Top 10 Banks, Scenario 1 Fees for Basic Checking Range from Zero to $14 per Month
Figure 14: Monthly Scenario 1 Account Fees for Top 10 Banks
Comparatively, all of the prepaid products reviewed incur Scenario 1 fees, and the range runs between $3.40 (Kaiku Visa) and $17.45 per month (AccountNow Gold and NetSpend FeeAdvantage).
The average Scenario 1 charge for checking products has risen about 13% since 2012, when the average among top 10 banks was $7.86 (see Appendix Figure 24). This year, as Figure 15 shows, the top retail banks charge an average of $8.84 per month for Scenario 1. But this compares favorably to the average of $11.02 a month among non‐bank prepaid products — nearly 25% more than the bank checking average. In contrast, the bank prepaid product average for Scenario 1 is just $6.89 a month, and this illustrates the ATM network benefit offered by banks compared to many nonbanks, which commonly charge for any ATM access.
One place in which checking product fees commonly differ significantly from prepaid fees is in the arena of insufficient funds. While the changes to Regulation E that were implemented in July 2010 require opt‐in coverage of ATM or one‐time debit card transactions that would result in an overdraft, consumers who do not want to face a transaction decline may choose to opt in to overdraft coverage through a transfer from a linked account, or they may incur an overdraft penalty. In addition, transactions such as checks or online bill payments that overdraft a consumer’s checking account can still incur a penalty. Generally either of the overdraft options — a fee associated with a transfer from a linked account or a penalty for the overdraft — cost substantially more than the transaction‐decline fee that may be imposed for insufficient funds associated with a prepaid card. This is an important benefit of prepaid for consumers managing finances on a tight budget.
Under a Baseline Scenario, Bank Prepaid Accounts Are Very Price Competitive
Figure 15: Average Monthly Scenario 1 Account Fees of Top 10 Banks and Selected Bank Prepaid and Non‐Bank Prepaid Accounts
Figure 16 compares average top 10 bank checking account fees under three scenarios. The base Scenario 1, under which no overdrafts occur; Scenario 2, which includes the same factors as the base scenario but also includes any fee for an overdraft covered by a transfer from a linked account; and Scenario 3, which includes the base scenario plus a penalty fee for a checking account overdraft. Notably, in all cases the average scenario fees have climbed since 2012 although, again, the mix of banks and bank products reviewed is slightly different from those reviewed in 2012, so this accounts for some of the differences in fees. Further, a monthly bill including an overdraft penalty fee is five times the more typical monthly fee described in Javelin’s base Scenario 1. As highlighted in Appendix Figure 25, all of the top 10 retail banks, with the exception of Capital One, charge an overdraft fee of more than $30. Capital One’s 360 Checking handles overdrafts in a manner similar to a short‐term loan, charging interest based on the amount of the overdraft.
Overdraft Penalty Drives Monthly Fee Average Five Times Above Base Scenario
Figure 16: Top 10 Banks’ Scenario Fee Averages for Basic Checking, 2012–2013
Figure 17 illustrates the comparative benefit of prepaid for consumers inclined toward overdraft behavior. Prepaid products help consumers restrict their spending to the balance loaded on the card. The reviewed products either do not assess a charge for a decline or charge a small decline fee of $1 to $2. While institutions certainly get more fee income from a high per‐item overdraft charge, the result is costly to the accountholder and to the FI in terms of customer satisfaction and the risk associated with insufficient funds. Prepaid options offer banks the ability to retain consumers’ business in a manner that may be more satisfactory and cost‐effective for both parties.
For Consumers Inclined Toward Insufficient Funds, Prepaid Is More Affordable
Figure 17: Monthly Scenario 3 Account Fee Averages of Top 10 Banks and Selected Bank Prepaid and Non‐Bank Prepaid Accounts
THE BOTTOM LINE
Banks and prepaid cards have each taken their turn as media villain in recent years. Who can forget the infamous Kardashian Kard, which, in addition to numerous other fees, carried an annual fee of $99.95?30 Similarly, 2011’s debit‐fee debacle and Bank Transfer Day movement illustrated a peak of consumer frustration with traditional FIs.31 Since that time, banks and prepaid providers have begun to aggressively readdress fees as they finesse product offerings to deliver value at an optimal price point. In the prepaid market, the recent introduction of products like the Bluebird card by American Express and Walmart and the Chase Liquid card effectively streamline product pricing and focus on transparency in customer communications. Bluebird has addressed its one glaring omission — the lack of FDIC insurance — by offering coverage through Wells Fargo Bank, N.A. or American Express Centurion Bank.32 And among the reviewed banks overall, prepaid offers a lower cost alternative to basic checking, giving institutions a strong alternative to offer underserved or budget‐conscious populations. (Interestingly, the two banks that offer checking accounts without a monthly charge have a different price structure than average. Capital One no longer offers a prepaid product, although it does offer a secured credit card to enable users to build a credit history. And in an inverse relationship to the pricing structure many of the other banks offer, PNC has a prepaid option that includes a monthly fee of $5, while its Free Checking product has no monthly fee.
Clarity in Fee Disclosure is Central to Effective Prepaid Marketing
Figure 18: Prepaid Fee Disclosure Examples
Clarity of fee information will also be important to the success of both prepaid and checking account products. The Pew Charitable Trust Model Disclosure Box for Checking Accounts was introduced in 2011, and it is one option for communicating checking account fee and process information.33 Likewise, the Center for Financial Services Innovation has proposed a Model Fee Disclosure Box for the prepaid industry, and Chase has proposed a concept that follows the Pew model for checking accounts (see Figure 18). Although an industry standard requirement is not essential, both of these concepts are effective steps toward better communication with consumers regarding financial product fees.
Payment Regulations Are Bringing Significant Change to the Financial Services Industry
Figure 19: Overview of Specific Recent U.S. Payments Regulations
Consumers Today Commonly Carry Reloadable Prepaid Cards
Figure 20: Percentage of Consumers with a Reloadable Prepaid Card, by Segment
Underbanked Prepaid Owners Commonly Reload at a Merchant Location
Figure 21: Reload Locations Used Most Frequently, by Gen Y, Underbanked, and All Prepaid Owners
Prepaid Spending and Frequency Significantly Higher among the Underbanked
Figure 22: Consumers’ Average Purchase Amount and Frequency of Monthly Use for In‐Store Purchases by Payment Type
In 2012, Larger Banks Were Most Likely to Charge, and Charge a Higher Fee, for Checking
Figure 23: Average Monthly Fee for Basic Checking by Bank Asset Category, 2012
2012 Fee Averages among Specific Bank Asset Groups for Baseline Monthly Scenario 1
Figure 24: Baseline Scenario 1 Average Monthly Fee by Bank Asset Category, 2012
Only Capital One Has What Might Be Viewed as a Modest Overdraft Charge
Figure 25: Monthly Scenario 3 Account Fees for Top 10 Banks
- A survey collected online by Javelin in October 2012 from a random‐sample panel of 3,217 consumers.
- A survey collected online by Javelin in March 2013 from a random‐sample panel of 5,534 consumers.
- A survey collected online by Javelin in October 2011 from a random‐sample panel of 3,210 consumers.