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Prepaid Debit Cards — Inflating the Bubble

Yes, I see a prepaid debit card bubble in the making.

We are currently experiencing a massive student loan bubble with loans outstanding in excess of $1 trillion dollars and rising delinquencies.

How long before it meets the same fate as the housing bubble which is, once again, being re-inflated.  Scroll down to my March 28 blog about housing bubble warning signs.

By now we’re all very familiar with the euphoria over housing and how it resulted in what could be the most massive bubble in history.  It didn’t end well.

One really good sign that we are in the midst of a prepaid debit card bubble is the recent announcement about the introduction of the Justin Bieber prepaid debit card targeted to the nation’s young folks.

Purportedly, its goal is to help educate them about managing finances.  Yea, right!

You see, it’s just not that difficult to spot financial bubbles in the early to middle stages of inflation.  All you have to do is pay attention to the many articles now available online and in those pesky newspapers that refuse to go away.

It was a recent article about prepaid debit cards in The Sacramento Bee that caught my attention and provided additional proof-points that a bubble is, indeed, being inflated.

The article’s title is a proof-point itself:  “Banks offer more prepaid cards.”  Here’s the article.

This article appeared in the Sunday, April 14, 2013 edition of The Sacramento Bee

This article appeared in the Sunday, April 14, 2013 edition of The Sacramento Bee

You just gotta love the quote from the FDIC official in bold above the article:  “Electronic cards are a good way to get people into the banking system.

What’s he smoking?

For the most part, the unbanked and under-banked don’t like banks and the banks generally don’t want these low-balance folks as customers.

So what’s changed?

From my perspective, there are only two reasons why the nation’s biggest banks, those bailed out by the government a few years ago, are rushing into the prepaid card market:

One, they are deathly afraid that Bluebird from the joint venture of AMEX and Walmart could ultimately lead to a full retail banking charter for Walmart.  They want to limit the number of customers captured by the low-cost Bluebird card.

Already, Bluebird balances now have FDIC deposit insurance so the card qualifies for direct deposit of social security and other government payments.

Two, the largely under-regulated prepaid debit card market is a treasure-trove of fee income waiting to be harvested.

Leave it to the big banks to find a loophole and rush in to take advantage of the situation.  With the loss of ODP fee income and debit card interchange income, there was a void to be filled.

Just remember, getting into the prepaid debit card business is not some altruistic decision to serve needy consumers – it’s about the fee income…and only the fee income.

We’ll see how fast these big banks dump these prepaid card customers the minute the Consumer Financial Protection Bureau issues its guidelines governing prepaid debit cards.  Remember what happened to Free Checking.

If the big banks wanted to reach out to the unbanked population, they could have done it years ago with lifeline checking accounts that were mandated by several states years ago.

Reading the newspaper article is quite entertaining and includes this major contradiction.

In the second paragraph we are told that the big banks “…are tapping into the pool of consumers who don’t qualify for a traditional banking account or can’t afford one.”

Then further into the article, the 16th paragraph, we are told that “…the large banks are gaining market share by leveraging their existing customer base, according to Aite Group.”

Hey, I thought that the main value of prepaid debit cards is that they are attractive to low-balance, credit-impaired, unbanked and under-banked consumers who would prefer to stay clear of banks of any size but especially the big banks.

They not only do not want to be nickel-and-dimed to death by the big banks, they don’t want to be treated as second-class customers.

Yet now we learn in this article that JPMorgan Chase is pushing these cards to a segment of its existing customer base.  I’d love to know the criteria being used to identify these “lucky” customers.

Here’s another quote from the article: “It costs JPMorgan Chase 40 percent less to serve its Chase Liquid prepaid card customers than clients with a checking account, since the majority of transactions are electronic, said Ryan McInerney, the company’s head of consumer banking.”

McInerney must be talking about those new customers plucked from the group of heretofore ignored, unbanked customers.

It’s all so confusing and unbelievable.

And let’s not forget the millions of consumers walking around with their SNAP prepaid debit card being loaded monthly by what used to be called the food stamp program.  I wonder how many of these card carriers now have two or more prepaid debit cards.

But one thing is believable – we are witnessing the inflating of yet another bubble.  This time it’s the prepaid debit card bubble.

The proof can be mined from the growing number of articles about prepaid debit cards.

TagsAite GroupAMEXBluebirdChase Liquid prepaid cardConsumer Financial Protection Bureaudebit card interchange incomeFDIC insuranceFDIC officialinflating another bubbleJPMorgan Chaseprepaid debit cardSNAP prepaid debit cardThe Sacramento BeeWalmart