Sub-prime

[Dave Birch] Credit card issuers aren’t very popular in the U.S. and they’re getting a torrid time from some quarters, includingmCongressional hearings this spring held by Senator Carl Levin. According to testimony, one witness exceeded his charge card’s $3,000 limit by $200 — triggering what eventually amounted to $7,500 in penalties and interest. After paying an average of $1,000 a year for six years, the man still owed $4,400. That experience has become all too common as the credit card industry has stealthily adopted methods designed to maximize burdensome penalties and fees, while ratcheting up interest rates as high as 30 percent. Companies bombard unwary consumers with teaser packages that promise very low interest rates to start, while reserving for themselves the right to raise rates whenever they choose. The details are buried in deliberately arcane contracts that run 30 pages long and that even lawyers have trouble understanding. What this means in practice, as with all payment systems, is that the costs fall on the people least able to afford them. One-third of U.S. cardholders are paying interest rates in excess of 20 percent. About a third of credit card accounts with balances pay little or no interest each month, which essentially amounts to a free or very low- cost loan. More than a third (36 percent) of accounts pay the regular interest rate. The final third of accounts — which are presumably the “sub prime” customers — pay interest rates that range from more than 20 percent to as high as 41 percent. What this kinds of press reports seem to show is that neither credit cards nor debit cards (ie, bank accounts) are good solutions for people with little or no money. What they need is cheap, simple, prepaid solutions.

Technorati Tags: credit cards, debit cards, payments, prepaid

Last year, we started some interesting discussions by asking “Where’s the Walmart?” Well, talking of Walmart, it is following other retailers who hope to tap into a large pool of consumers who deal mostly in cash, but want the convenience of plastic. Alfredo Padilla, a Wal-Mart spokesman, says

We want to help the underserved — the people without a traditional banking relationship.

The Walmart Moneycard, a prepaid Visa card that allows customers to pay bills, sign up for direct deposit and shop online. There is a $4.94 monthly fee, which is waived when $1,000 or more is loaded in one calendar month or the cardholder takes advantage of direct deposit. It requires no credit check or checking account, eliminating some of the barriers non-bankers shy away from. According to a Federal Reserve study, while 22.6 percent of non-banking families reported that they didn’t like dealing with banks, the top reason for not having a bank account was that 27.9 percent simply don’t write enough checks. To help alleviate some of these deterrent, Wal-Mart has added already extensive financial services with this MoneyCard. Before the prepaid card was the ability to cash checks, make money orders and transfers, pay bills, apply for a credit cards and request credit reports. There are already 2,600 MoneyCenters in Walmart stores.

A survey of U.S. consumers by the Network Branded Prepaid Card Association provides further support for the prepaid push into the sub-prime market. They found that satisfaction among consumers who have already used a reloadable prepaid card is extremely high: 88 percent had a positive experience with the cards and found them useful. There are differences, however, in the details. Although cash-based consumers are more likely to have used a reloadable prepaid card (25 percent compared to 14 percent of all respondents), as a group they are less likely to have heard of the card (48 percent compared to 60 percent of all respondents), presumably because they don’t pay attention to card advertising of any kind. Anyway, interest in getting a prepaid card is high amongst cash-based consumers:

• 74 percent of those who pay their bills using money orders,
• 73 percent of those without a checking account,
• 63 percent of those who use cash to pay a bill or ask friends to write checks,
• 63 percent of those who are paid in cash or use a check cashing store.

But note that — as Consult Hyperion found in some previous studies for clients looking to enter the pre-paid card business — in addition to the obvious need for reloadable prepaid cards among cash-based consumers, consumers with traditional banking relationships also find them valuable: 54 percent of consumers who are paid through bank accounts still say that reloadable prepaid cards would be useful. So it’s wrong to see pre-paid cards as a sub-prime only opportunity. Consumer like the idea of having different “jam jars” (as we used to call them back in the Mondex days) for different spending purposes, and there’s no reason not to help them to do this with cards rather than cash.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]