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Orman takes flack on prepaid debit

By Claes Bell, CFA · Bankrate.com
Friday, January 13, 2012
Posted: 4 pm ET

Suze Orman is taking considerable flack over the prepaid debit card she introduced this week. Phillip Taylor of PT Money in particular took exception to Orman's idea that the card should be a permanent replacement for a checking account, insisting a checking account at a responsible bank or credit union is always a better choice.

Taylor's view echoes some of the issues I brought up with the RushCard a few weeks ago. For a personal finance writer, it's hard to swallow a strictly mandatory monthly maintenance fee, when there are credit unions and community banks out there who are offering similar services basically for free. He criticized her on his blog and got a sharp response back from Orman in return.

But I think, beyond the fact Taylor is getting awfully worked up over a maintenance fee that amounts to $36 a year, he's also misreading the situation in some ways. Daniel Wolfe has a really thoughtful column that sums it up really well:

Orman's prepaid card, like nearly all prepaid cards, carries fees. As bank customers, we're not used to seeing fees displayed and charged so prominently. We get all our fees waived by meeting a minimum balance and using direct deposit and online bill pay. We have no idea what our monthly fee even is. And if we ever get an unexpected fee, we pick up the phone to get it reversed.

Because we are so committed to this method of handling our money, these fee-laden prepaid cards look like a bad deal. Having such visible fees, even if they're low, is an alien concept. It's like wearing your underwear on the outside. It just isn't done.

And from this perspective, we never understand how an underbanked person views prepaid cards. In their eyes, these cards look great. They even look honest.

No story illustrates this better than a 2009 NPR piece about a man named Al Walker who uses an expensive check-cashing store even though he has a bank account. The reporter even showed Walker, fee by fee, how he would save $5 per check just by depositing them in the bank account he already had — but Walker refused to use the bank.

"I don't have to worry about an overdraft fee here" at the check-cashing store, he told NPR. "I don't have to worry about overdraft protection. I don't have to worry about whether this is free. I know what I'm paying; it's the same every time I come here — and maybe that's something banks should look into."

I think Wolfe is exactly right. Prepaid cards are popular in part because many banks simply poisoned the well with low-income customers. I have known people who have had their modest direct-deposited paychecks -- hundreds of dollars -- devoured entirely by overdraft fees incurred unknowingly on multiple small purchases.

Notwithstanding the fact that overdraft is now opt-in only, it only takes that happening once to make someone really suspicious of their bank and the banking industry in general. For someone with no savings, losing a paycheck can mean the humiliation of going to family and friends for a loan, going in debt to a credit-card company or a payday loan place, or worse, missing meals or getting evicted.

Many banks' business model was, and to a certain extent still is, predicated on making money from customers' mistakes and lack of funds. That's naturally going to make people who frequently make financial mistakes and lack funds turn to financial services that operate on a different model, in this case, fee-for-service. In the end, they are willing to pay a few dollars to ensure they will never have their account drained by fees and be forced to deal with all the negative consequences that entails. Add to that the fact that there are fewer bank and credit-union branches in low-income neighborhoods, and many low-income folks are cooling their heels on ChexSystem's naughty list, and you have a recipe for prepaid debit popularity.

As I've said before, I still think that the better long-term solution for most people is a free checking account from a credit union, community bank or online bank. But if the choice is between prepaid debit and cash-only plus check-cashing, I'm going to say prepaid debit wins.

I also think, if we want fees to be clear and reasonable, we need to get away from this idea that getting financial services for free is some kind of natural human right. Sure, check-cashing services charging someone 2 percent of their paycheck to cash it week in and week out is unreasonable. But asking someone to pay $3 a month to have their paychecks automatically direct deposited onto an FDIC-insured debit card that works anywhere on the planet isn't exactly Mr. Potter turning Bedford Falls into skid row.

What do you think? Is prepaid debit predatory, and should Orman be condemned for offering one?

Follow me on Twitter: @ClaesBell

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18 Comments
linn
February 21, 2012 at 2:21 am

Several major points were missed in this article when describing this debit card. It was primarily created by Suze Orman for those that are trying to get out of debt, and it was created for those to establish credit. It's third purpose is to establish a means to completely get rid of the traditional credit cards that have gotten so many people into debt. She said that it will not be immediately recognized by FICO for scoring purposes but will eventually be recognized as such. Credit cards have become the bane of our existence. We need to go back to the "old ways" and simplify our lives by only spending what we can afford.

Mary
February 03, 2012 at 3:21 pm

ALL OF THE ABOVE happened to me, I am so disgusted with myself for being taken advantage of. After several hundred dollars in overdraft fees, I ended up getting a payday loan. Now I'm stuck in that merry-go-round. I intend to use my tax refund to pay them off and I hope and pray I never have to us them again. And I will probably close my checking account and get prepaid cards from now on, simply because, like the man said, at least I know what it's going to cost me. Rich people don't have to worry about these issues but they do love to criticize.

JB
January 17, 2012 at 9:56 am

Seroiusly, how does a prepaid debit card help? How about having a savings account with a limited amount of money at a credit union and use a debit card?

charlene
January 15, 2012 at 6:03 pm

Prepaid cards just works better for some people. Sometimes when you swipe your bank debit card the payment doesn't show up for a day or two and this can lead to overdraft payments etc. Prepaid cards are better for people who have a hard time tracking each purchase. Also, if you have ever had issues with payday loans, garnishments etc. prepaid cards can be a blessing. I had an issue where payday loans basically took over my checking account. I had to close the account and open a new one at a new bank. I still have a credit union bank account but I understand why people need prepaid cards. It's a great option to have.

William
January 14, 2012 at 2:32 am

I admit that I fall into the catagory of having made some major financial blunders in the past, which leads to why I really prefer to use a pre-paid debit card. As a result of my past mistakes, I have several garnishments lined up against my paycheck, but I learned the hard way several years back that maybe the law only allows a maximum of 25% to be taken from your paycheck for garnishments, if you are on direct deposit once your paycheck hits your account it is 100% fair game! I lost the apartment I was renting at the time because even though the garnishment had been taken from my paycheck, my bank account was emptied the very next day after payday! Pre-paid debit cards are, by federal law, protected against garnishment! This has saved my tail sooooo many times in the past, and thanks to the fees and charges associated with so many bank accounts now I will probably never switch back from my pre-paid card once the garnishments are cleared up for me.