Tag: prepaid debit

  • The Disingenuous Mr. Russell Simmons

    Posted by

    Adam Levitin

    Russell Simmons (yes, the hip-hop entrepreneur and vegan advocate) is blogging away at Huffington Post against the Durbin interchange amendment.  Simmons claims that his card takes "the poor, the voiceless and the
    under-served" out "from the claws of payday lenders and check cashers, from
    humiliating
    lines waiting to cash their paychecks and then more lines to pay their
    bills." 

    Gosh, you'd think that Russell Simmons was operating a
    charity. Somehow Simmons neglects to mention how much money he is pocketing from debit card swipe fees in addition to the $1/transaction "convenience fee" the RushCard charges its low-to-moderate income users.  (See here for more details on the RushCard.)  The RushCard is an alternative to check-cashing outlets, but that's all that it is–another high-cost financial service for the poor.  I'd be curious to know how much revenue the RushCard makes on interchange; I suspect it would still be quite profitable without it.  Maybe Russell will show us the books.

    Russell Simmons is claiming to be the voice of minority communities and the poor on interchange.  He's not, and his personal financial interest in maintaining high interchange rates compromises him as an advocate on interchange, just as the fees on the RushCard compromise him as an advocate for the poor. 

    It's worthwhile looking at what The Hispanic Institute, which has no financial stake in the matter, found in an empirical study it sponsored on interchange fees.  The study finds that there is a regressive cross-subsidy that has a disproportionate negative impact on low income minority communities.  

    Simmons also misunderstands (perhaps deliberately) the Durbin amendment in his post; he complains that it regulates debit interchange while leaving credit interchange untouched, and that this dings the poor, while leaving the rich unscathed.  That's just wrong.   While part of the amendment deals only with debit cards, part covers all payment instruments, including permitting merchants to offer a discount for debit (how does that hurt the poor?).  The impact of reduced debit card interchange will inevitably be reduced credit card interchange rates for smaller ticket transactions where credit competes with debit. 

    The logic of the Durbin amendment is straightforward:  debit transactions are just like checks, but with even lower fraud risk because of real-time authorization.  Checks clear at par throughout the entire banking system.  Therefore, debit should clear at par too (or close to it–the amendment is generous in this regard).  If debit clears at near par, credit interchange rates will drop, and because merchants are, in general, more price competitive than card issuers, the savings will be largely passed through to consumers.  The card industry will have to learn to live with reduced (but still substantial profits), which should incentivize the card industry to innovate to develop new, efficiencies or higher margin products.  Net result:  consumers win.

  • Russell Simmons, Interchange Crusader

    Posted by

    Adam Levitin

    It's amazing who the interchange debate will bring out of the woodwork.  Hip-hop entrepreneur Russell Simmons has been making the rounds on Capitol Hill (and on Huffington Post) urging Congress not to act on interchange reform.  Why is Simmons so engaged with this issue?  

    The answer is because he makes a lot of money off of interchange from a very questionable product.  Simmons markets the "RushCard" a Visa-branded prepaid debit product marketed primarily to the black community.  The card provides a payment device for an ersatz deposit account, which allows cardholders to make transactions when cash is not accepted.  Remember that there is no extension of credit to the consumer on the RushCard.  Instead, like any prepaid debit product, the RushCard consumer is actually lending money to Bancorp Bank, the card issuer.  And, as we'll see, the consumer is actually paying money to make an interest-free loan to the Bancorp Bank.  

    Simmon's claim is that the RushCard provides important access to financial services for the unbanked:  it's helps consumers avoid check cashing and bank account fees, has greater security than cash, is convenient, and it's "the prepaid card that provides respect." 

    What's respect worth?  Well, take a look at the fee schedule below and decide for yourself.  

    (more…)

  • Banking the Unbanked–Government-Sponsored Prepaid Cards?

    Posted by

    Adam Levitin

    Blogging about the RushCard has me thinking.  Prepaid debit is filling a market need for financial services (payments and safe-keeping) for the unbanked.  But prepaid debit products are often as predatory in their pricing as check-cashing outlets.  So two questions.  

    First, why isn't this market working better?  That is, why isn't competition pushing out the bad products and lowering prices?  This can't be a credit-rationing or red-lining story, as there's no credit (and almost no risk) involved with a prepaid product.  

    And second, is this market isn't working, what role for government?  There are lots of ways to respond to market failures, and a lot depends on identifying the nature of the market failure.  But one option, when the private market isn't working, is to spur it along with public competition.  To this end, it's worth considering the possibility of government-sponsored prepaid debit cards as a means of providing low-cost basic financial services access (payments and safe-keeping) to the unbanked (who are generally low-to-moderate income (LTMI) consumers.  

    Payment systems are the infrastructure backbone of commerce; we should want to ensure that all Americans have basic commercial access; it's no stranger to think of the government subsidizing payments than for the government to subsidize rural housing or rural broadband.  I think there's a case that since the private market is not providing low-cost access to basic financial services for LTMI consumers that government competition in that market is a reasonable policy response.  A low-intensity form of postal banking through prepaid cards could be a way to bank the unbanked.   

    The government already transfers a variety of welfare benefits to consumers using prepaid debit–SNAP benefits (foodstamps), Social Security, state benefit programs, etc. But these programs are just using prepaid cards as a means of transferring funds to consumers.  They could be leveraged to achieve a broader goal of providing LTMI consumers with no-or-low-cost access to basic financial services like payments and safe-keeping of funds.  For this to work, entitlement programs would have to be combined with a reloadable, prepaid government-sponsored debit card.  

    There would be a thicket of operational issues to work through for such a program, including the expense (I suspect that float income alone might be sufficient to fund a large-scale program with economies of scale) and then there is a conceptual question of whether we want a "public option" of this sort?  Do we think there is value in public-private competition?