After Bank of America endured a flood of criticism for offering undocumented immigrants savings accounts and credit cards in 2007, nimbler, less-conspicuous players have stepped in to pick away some of the estimated $4 billion to $5 billion that immigrants pay in fees for financial services.
These players are offering products that look like credit cards and function like debit cards, but have no traditional bank account associated with them. Called reloadable prepaid general spending cards, these cards are branded with the Visa, MasterCard and Discover logos and are accepted wherever those network brands are processed.
Because they don’t require traditional bank accounts, many don’t require Social Security cards, the flash point that generated controversy for Bank of America.
They are sold at supermarkets, Western Union locations, gas stations, convenience stores and ethnic markets. Increasingly, they also are distributed by service sector employers, who directly deposit wages onto card accounts instead of handing out paychecks. While the cards look and function like credit cards at stores, they offer customers access to money they have deposited into quasi-bank accounts, like debit cards.
Bank-like services without the bank
“What these card programs have figured out is that the immigrant population doesn’t necessarily feel welcomed at banks because they’ve had bad experiences before, or for cultural reasons,” says Red Gillen, a banking and payments systems senior analyst at Celent, a Boston-based financial services research and consulting company. “But nonetheless, these programs realize that banks offer great services like debit cards, international remittances, overdraft protection, etcetera.
|BofA’s original program alive |
but hasn’t expanded
Bank of America’s original pilot program in Los Angeles — the one that helped launch this trend — is still in operation, but it has yet to expand beyond the City of Angels.
Bank of America spokesman James Pierpoint says the bank continues to offer credit cards to existing customers who are utilizing Individual Taxpayer Identification Numbers (ITINs). These numbers are provided by the IRS to people who need a tax ID number but do not have a Social Security number.
Pierpoint said the move “made a lot of sense” for several reasons when it was launched.
“The Treasury Department was encouraging financial institutions to make access to financial services to everybody — but especially to immigrants — so that we would have a way to bring people into the mainstream,” Pierpoint said. He said that would make it easier to track down money launderers and even terrorists.
Saying it was proprietary information, Pierpoint wouldn’t elaborate on any future plans to expand the program. No plans have yet been announced, however.
“So these programs say, ‘Wait a minute, let’s just mimic the bank with all of the ancillary services, but we’ll simply supplant the checking account with this card account,’ ” Gillen says. “It’s ingenious.”
The cards allow customers to pay utility bills online or by phone, bypassing retail financial stores such as check cashing stores, which charge fees for money orders to pay bills. The cards allow savvy customers to request of their employers to directly deposit their paychecks to their accounts. Many card programs allow customers to make secondary cards that can be loaded with certain dollar amounts and sent to relatives overseas, bypassing wire transfer fees.
The Department of Homeland Security estimates that 11.6 million unauthorized immigrants live in the United States. Each year, these immigrants pay approximately $2 billion in check cashing fees and $2.4 billion in fees for remittances to family members in their home countries, according to the Federal Reserve. The Latino Community Credit Union in North Carolina first started offering credit cards to immigrants without Social Security numbers since its first branch opened in 2000. A few years later, Bank of America started offering credit cards with no Social Security numbers needed as well.
Gillen estimates an additional 25 million individuals make up the “unbanked” or “underbanked” population. That means that more than 35 million people in the United States do not have bank accounts, many instead use retail financial services such as check cashers.
A January 2008 Brookings report titled “Banking on Wealth” estimates that check cashing businesses charge customers on average $40 per payroll check to cash checks. Some states cap the dollar amount and the rate that check cashers can charge — from $1 or 1.64 percent in New York City to 10 percent on personal checks in Maine. Many states, however, do not regulate the check cashing industry.
Prepaid reloadable general spending cards vary in their fees, as well. (See fact box.) “We’re in the early stages of a highly competitive market, and you do tend to get a lot of different products with a lot of different features and different price points because providers are trying to figure out where the sweet spot is,” says Paul Tomasofsky, executive vice president and acting COO for the Network Branded Prepaid Card Association in Montvale, N.J.
“One prediction I will make is that this market will grow,” Tomasofsky says. “It will grow substantially because there is value and utility associated with the product, compared to the products that they are replacing. There’s no question about that.”
Tomasofsky says while branded reloadable general spending cards have been in the market over the past seven years, many consumers have yet to learn about the how the cards can be used. “There are cards in the marketplace. The market has been launched. But now is the time to start penetrating that market,” Tomasofsky says.
The reloadable spending card market potential among the unbanked or underbanked sector, Gillen of Celent wrote in a December 2007 report, is $192 billion. A Federal Reserve report released a report this March that estimates consumers loaded and spent more than $13.2 billion in 2006 through 22 open-loop prepaid card providers. (Open loop is an industry term for cards that can be used in multiple places.)
Big prepaid card roll out
In 2007, several large players announced they were entering the prepaid market, including Wal-Mart. It rolled out the Visa-branded Money Card, issued through GE Money Bank, in June 2007.
Then in November, Capital One bought a minority interest in NetSpend, a leading prepaid spending card player, whose Visa and MasterCard branded cards are sold at several large grocery chains throughout the United States.
In August 2008, the world’s largest credit card issuer, Citi, announced it was entering the reloadable prepaid card market through a partnership with the Green Dot Corp., another leading provider that sells MasterCard and Visa branded cards through Wal-Mart, Walgreens, pharmacies, gas stations and other stores.
Also in 2008, a Wells Fargo official said the bank was testing the prepaid reloadable market, offering prepaid reloadable cards at its banks to new and existing customers seeking alternatives to carrying cash.
New players in the market
As the market has become more competitive, newer and smaller firms have come on the scene, bringing lower-priced cards that may drive down the fees. A Tampa, Fla., financial services software company called nFinanSe recently launched a Discover branded card, which sells for $5.95, and then charges a $2.95 monthly service fee. “What we’ve done is, we’ve looked at this and we believed that the market was not pricing this correctly,” says nFinanSe CEO Jerry Welch. “We just think that the market is just developing and the initial pricing was too high.”
Employers eye reloadable cards
Employers and payroll services companies, such as Sage Software, are increasingly entering the market, as well, and leveraging the size of their companies to lower fees for reloadable payment cards.
Sage started a pilot program, offering reloadable payment cards to its employer customers in the services sector eight months ago. Bill Zint, director of product management for Sage Software, the North American affiliate of United Kingdom-based Sage Group, a payroll software services company, says his company negotiated with Visa to offer a payroll card that charges an initial fee of $2 to issue payroll cards with a $2.25 monthly fee.
One prediction I will make is that this market will grow. It will grow substantially because there is value and utility associated with the product, compared to the products that they are replacing.
|— Paul Tomasofsky, executive vice president and acting COO|
Network Branded Prepaid Card Association
“When we investigated fee structures (for reloadable payroll payment cards), I was absolutely amazed at what even the largest banks wanted to charge us for the program,” says Zint.
Because the company processed payments for 12 million employees through its software services, Zint says Sage was able to negotiate lower fees.
“Our customers have been asking for this for a long time,” Zint says about the reloadable payroll payment cards. “We’re very big in the services sector, and that’s where you’ll find a high percentage of unbanked employees, those who don’t have access to bank accounts.”
Cards beat paper
Employers save money by directly depositing money to card accounts versus issuing and delivering paper checks and making stop-payment requests for lost checks, Zint says. Additionally, employees avoid paying check cashing fees and having to carry large amounts of cash.
“One nice thing about all the cards is they make it much safer to store money,” says Joshua Wright, director of social enterprise programs for Washington, D.C.-based Center for Community Change, which negotiated a reloadable payment cards program with Account Now, another big player in the reloadable payment cards industry. “In communities where people carry a lot of cash, criminals know that and they become targets. So, that’s one good thing about almost all the cards. But I think a lot of cards aren’t great, so you have to be very careful.”
The center, which champions issues connected with assisting the poor, finalized an agreement in May 2008 with Account Now to offer a MasterCard branded reloadable payment card to its grassroots organization members throughout America. The card costs $5 for activation. Payment cardholders are charged a $2.50 monthly fee, which waived if they load at least $1,500 a month.
The goal was to offer members a financial alternative to check-cashing stores. “We were going to either go with a prepaid card or a credit union,” Wright says about initial plans to offer its members a financial alternative to check cashing stores. “The objective was to find a financial services product that would help people lower their cost for financial services, versus what they’re paying check cashers now and for money orders and high cost remittances. We offered a product that would reduce their costs and move them toward getting into the financial mainstream.”
Wright says if immigrants and other unbanked workers are unable to obtain cards through employers or community organizations, he recommends they consider looking at retail reloadable spending cards, with the caveat that they really examine the fees.
“The card can be a very good product, but customers have to be very careful,” Wright says. “It looks appealing. It has the MasterCard brand on it, so there’s some cachet to it. But it could easily add up to more fees than if you’re just cashing the check and using all cash.”
See related: House Bill challenges issuance of credit cards without Social Security numbers, Bank of America offers credit cards with no Social Security numbers needed, BofA defends ‘no SSN’ credit card pilot program