[Dave Birch] I’m taking part in the PayExpo “Pre-Paid Dragon’s Den” tomorrow so I’m thinking about prepaid today. I’ve written more than once about the use of prepaid alternatives to bank accounts, so I was very interested to read about a women taking legal action against her employer for forcing her to accept a prepaid card to receive her wages in (where else?) the US. Her complaint is that she gets ripped off because of the fees that are associated with card use.

The J.P. Morgan Chase payroll card carries fees for nearly every type of transaction, according to the lawsuit, including a $1.50 charge for ATM withdrawals, $5 for over-the-counter cash withdrawals, $1 to check the balance, 75 cents per online bill payment and $10 per month if the card is left inactive for more than three months.

[From Woman sues McDonald’s franchisee for payroll debit – News – The Times-Tribune]

Now, I remember working on a project for a client in the financial services sector on a payroll scheme for casual workers. This was some years ago and I don’t want to mention the company as it is not relevant to the issue (it wasn’t in QSR). They worked out that it cost several dollars per worker to mess about with cash or cheques so they went with a scheme that cost $X for an ATM withdrawal (I genuinely can’t remember how much it was, but it was in the region of $1) and gave everyone a pay rise that equated to two ATM withdrawals per week. The overall idea, remember, is that you don’t want people withdrawing cash at all, which is why they are charged for it, you want them to use the card at POS. I thought this was a good solution, an actual win-win. The employer saved money and the employee got a convenient way to access cash if they needed it. Since that time, I think the potential market for this kind of product has expanded beyond the unbanked (and the underbanked).

Prepaid cards have also become attractive alternatives, said John Ulzheimer, president of consumer education at SmartCredit.com… “[T]here has been very aggressive marketing of prepaid debit cards over the past few years targeting young people and minorities,” he said. “So it’s not a surprise that more young people are using prepaid debit cards over credit cards.”

[From Young Americans are ditching credit cards – Jun. 14, 2013]

Some of those fees (e.g., $1 to check the balance) do seem a little high in an age of laser beams and interwebs. In a modern pre-paid debit scheme — what you might call a “near bank” scheme — those other fees for balance checking etc should vanish. It seems to me that there are plenty of suitable products out there already. We happen to use O2 Money in our house and it’s a terrific product (*). The product comprises a smartphone app and a companion Visa prepaid card. I can top the card up from my phone and when the kids use the card to buy something the confirmation pops up on my phone instantly. I can see the balance and the transaction history.

I was surprised by how much of the comment around the O2 wallet launch was of the form of “O2 becoming a bank”, which it clearly isn’t… Perhaps a “near bank”, but not a bank.

[From Why O2 Money is interesting]

As it happens, Consult Hyperion is providing consultancy support to a Cabinet Office “Alpha Project” looking at the use of a prepaid product — coincidentally the O2 Mobile Money product — in connection with unbanked groups. I’ll write about this more when the results start to come in, but it reinforces my point: for a great many people a prepaid “near-bank” mobile-centric transaction account is the correct choice for both those consumers and the banks that would otherwise have had to provide a money-losing bank accounts to them. And I don’t think it controversial to say that as far as I can see, a great many low-income consumers would be better off being paid wages and benefits through something like an O2 Money account rather than a current account, which is why it makes both the British government and the European Commission’s odd focus on the bank account as the centre of their financial inclusion narrative is misplaced.

This is not an anti-bank point. Far from it. What is the point of a service that loses money for the providers and that the customers forced to use it don’t want anyway? Far better to shift the customer to a more appropriate kind of account and then focus on selling more appropriate value-added financial services (with the added benefit of a transactional history that can substitute for a more conventional credit history when it is not available, or prejudicial). This is a win-win-win. It’s a win for employers and governments who are making the payments, it’s a win for the banks and the “near banks” and, most importantly, it’s win for people who would otherwise be trapped in the cash economy.

(* Before the e-mails start arriving, here is the full disclosure: “Consult Hyperion has provided paid professional services to Telefonica O2 UK in connection with mobile payment services”.)

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

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