MasterCard now hold a 33% stake in Accor's subsidiary, PrePay Technologies...which they acquired last year. PrePay Technologies has issued more than 20 million pre-paid cards in the UK and holds a license to issue e-money in 17 European countries. While Accor will continue to go after the corporate and public sector markets, it is believed that MasterCard will tout the pre-pay opportunity to member banks. That's where it got interesting for me.
The problem that I see with offering a prepay opportunity to banks is simply that banks make "way too much" money on overdraft charges (ODC) they derive from signature debit and checking accounts.
A prepaid card would be declined, showing insufficient funds were available, the way debit cards originally did. This would take a huge bite out of the $37 billion in overdraft, and ironically, overdraft "protection" charges. (ODP) How many billion? Yes, I said 37 of those bigboys.
I get my data from a new study by management consulting firm Bretton Woods which found that banks and credit unions collected a staggering $37 billion in non-sufficient funds and overdraft fees in 2008. This represents an increase of 97% over the past 3 years. In fact, while I'm on the subject, I'll share some more data from that report. It's amazing:
- Bank and credit union income from non-sufficient funds (NSF) and overdraft program (ODP) fees exceed $37 billion.
- The national annual NSF cost per household with checking accounts is approximately $368.
- Active households pay $1,472 in annual NSF fees.
(defined as the 20.2 million households with bank or credit union accounts) - The average United States household with a banking account incurs 12.7 NSF fees per year.
- Bank and credit union data used in Bretton Woods’ modeling was determined from 1.28 billion separate check and electronic NSF items.
So why mess with a good thing? Prepaid cards, as the Aite reports suggests, may be a "very credible" alternative to checking acccounts for consumers, make that..."consumme'rs. (Soups On!) Banks are the real "consumers" here as they're the one's eating us alive with $37 billion worth of ODC. It's okay...we'll bail 'em out, they've had our babyback for years. Certainly I would expect for banks to come up with new ways to nickle and dime us to death on a prepaid solution, but compared to $35 a pop, nickles and dimes are "insufficient funds" and won't add up to $37b. So the question is can they craft a $37 billion dollar way to ream prepaid card users? That 's going to be tougher. Of course, if bank customers want to take a bite out of, or eliminate overdraft charges altogether, they can simply enter their PIN...which transforms the transaction into a real-time debit.
PIN Based transactions are the equivalent of saying to the banks..."No Soup for You!"
Prepaid Debit Cards: A Credible Alternative to Checking Accounts
Aite Group reveals that at least 14% of bank customers would be better off using prepaid debit cards than checking accounts.
Boston, MA, February 11, 2009 – A new report from Aite Group, LLC argues that prepaid debit cards represent a competitive threat to banks' checking account relationships. It also provides insights into how banks, prepaid debit card providers, payday lenders and other parties can take advantage of prepaid debit cards.For years, banks in the United States have viewed unbanked and underbanked consumers as a promising segment they could address through traditional checking account relationships. Few banks have realized that new technology and financial products may actually render the checking account relationship less attractive to this customer segment. In fact, at least 14% of checking account holders would be better off switching to a prepaid debit card.
"This is not just doom and gloom for banks," says Gwenn Bézard, research director with Aite Group and author of this report. "The most sophisticated among them could profit on the appeal of prepaid debit cards, as can other obvious stakeholders such as prepaid debit card marketers and payday lenders. For example, banks could rapidly gain market share by striking co-brand deals with leading prepaid debit card marketers that have a head-start in this race."
This 29-page Impact Report contains 24 figures. Clients of Aite Group's Retail Banking service can download the report by clicking on the icon to the right.
Related Aite Group Research:
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