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Orman takes flack on prepaid debit

By Claes Bell · 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
Chris
January 14, 2012 at 12:45 am

I have a prepaid debit MasterCard, and I love it. Why do I need a checking account or credit card? I know exactly what I am spending and on what. I don't have to ever worry about an overdraft wiping out my money period, and I will never be able to go into debt like with a credit card or with a regular checking account. It's very easy to go into overdraft with a checking account. It's always funny how those ten dollar service charges seem to post right when you have only five dollars in your account. With my prepaid, that doesn't happen. I can get cash without an atm machine fee by getting cash back at a Point of Sale card swipe in any supermarket. Tell me what I am missing by not having a checking account or credit card.

William
January 14, 2012 at 12:09 am

When it comes to pre-paid debit cards, I actually got mine through Walmart. I understand many of your points, and they are good ones, however there are many of us who just don't trust banks. My paycheck is direct deposited to my debit card, my wife and my grandson are both on Social Security Disability and they each have their own debit card (from the government). To us, these make sense because we have gotten in trouble with checking accounts, payday loans, etc., this way we are not tempted or get our heads underwater. Pre-paid debit cards are like pre-paid cell phones, no contracts, no hidden fees, nothing that will zap your account for stupid banking fees. Long-term? Who knows if I will ever deal with a bank again. I don't plan on buying a house ever again (thanks to the economy) and if I need a car, I'll buy a good used one with cash. Because of stolen ID, my credit is shot to hell. I'm filing bankruptcy because of it. So if someone steals my pre-paid debit card, well I simply close the account and get another one and they end up with a worthless card. That simple.

Jen
January 13, 2012 at 10:44 pm

"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."

LOL - if you swipe your card and spend more money than what is currently available in your account you will be charged overdraft fees. How hard is that to understand? Keep a register of all checks, ATM withdrawals and debit card purchases and I guarantee if you balance that register against the bank statement you will know the available funds in your account. What a pitiful excuse, yet it makes me laugh.

Eddie
January 13, 2012 at 9:34 pm

Prepaid cards work for the "under-banked" because they are convenient, i.e. they can be used ON-LINE and often in place of a credit card for identification. Certain prepaid debit cards can be used to set up and fund a paypal account (yes, they can, no matter what others say), ebay (yes, they can, no matter what others say), paying bills online and countless other transactions. Ask me how I know? I've used nothing, but debit cards for four years. I still have my credit union account, but can only access $300 a day via it's debit card. I want access to all of my money when and where I want. My Netspend prepaid card has over $6,000 on it, with no monthly fee or per-transaction fee. I can spent that $6,000 on one purchase if I want and don't have to worry about a per-day limit like with most "real" debit cards.

P. Phoenix
January 13, 2012 at 9:26 pm

Why do people need pre-paid debit card? you have money in you checking account and every time you use it, it takes money out of your account like you write a check. If you have kids in college and don't want them over spend, just open an account with your name and your child's name, deposit enough each month and let them know the amount allowed so they won't go over. You can also use your debit card as credit and you never have to pay fees. I have debit card since way back when and never paid a dime for it. I bank online and I always check to make sure I won't go over so bank can't charge me over draft fee. Simple!

Philip
January 13, 2012 at 8:59 pm

Hey, Claes, please give credit and link to my full post so people can see the context. Thanks. I'd also like to see Wolfe's piece in full. Apologies if I missed the link.

The reason I was worked up was not due to the $36 alone. There are many things at play here with her offer. Plus, Suze called me ignorant when I tweeted that I couldn't believe she released a weak prepaid debit card. Suze and I may differ, but neither of us is ignorant.

Wolfe's take is anecdotal, I tried to stick to the facts. So, according to him products pass muster if *anyone* finds them useful? In that case, plenty of people find payday loans useful.

For the record, I like prepaid debit cards for certain situations. I even promote them on my site. But you and I both know they aren't the best financial product and one certainly shouldn't live their entire financial life off the grid with one of these.

So to answer your question, no, prepaid debit isn't predatory. Prepaid debit for the long term (as the fee-ridden card offerings stand today), is predatory. As for Orman, I don't think she should be condemned for offering a prepaid debit card. But she's not simply offering up a card. She's claiming it's "revolutionary" when it's merely just another prepaid card. She's promoting it to people who don't need it, like the "middle class" banked. She's even insinuating that this card will help you build your credit. That's what she should be condemned for.

joann
January 13, 2012 at 8:15 pm

I have sent prepaid cards to my son away at college. They are easier than writing a check and waiting for him to cash it. At the same time I also remember his dad and I starting off with a prepaid credit card ($500 on it) to help build our credit when we married right out of high school. It isn't a horrible thing; it isn't for someone who already has a credit card either.

BTW, your credit score can impact things other than your ability to borrow money. Employers may use it to help screen job applicants, insurance companies use it to determine rates, and even renters may find a poor credit score ruins their chances of renting in certain school districts (unless they pay for the entire year-long lease upfront.) Your credit score can hold you back in many ways beyond the ability to buy a home or car.

Maryann
January 13, 2012 at 6:34 pm

,,,even if she gave the profits away to a charity, people would find some reason to rake her over the coals for this; and we don't know that she isn't giving it all away to pay for the employees of her company managing these accounts. she has a right to make money off of us .. and at least she give something in return - a reporting to credit agencies on her customer's behalf.

Maryann
January 13, 2012 at 6:32 pm

The # 1 reason for people to have Suze's debit card instead of other debit cards is that her card can help someone BUILD their credit rating (FICO scores).

She didn't market this card to the UN-banked but those who use DEBIT cards responsibly but yet, don't yield the benfits they would if they used a CREDIT CARD - so her card can help your FICO score go up or down.

Some people pay CASH and are not IN DEBT but their credit score has not moved up in years - by paying w/ cash [their debit cards], they are actually hurting their score, not helping it.

Who needs a good FICO score? Anyone who wants to use someone else's money to get ahead.

jeanette scotton
January 13, 2012 at 6:30 pm

I think Suze is right on track... my little bank is GOUGING me with fees (even undisclosed fees)...
HOWEVER< she is SOOO rich already why doesnt she partner up with like the SALVATION ARMY AND GIVE ALL OF THE 3 dollars to thOSE hurting in the USA? THEN MILLIONS MORE PEOPLE WILL USE HER CARD...and the banks will actually have to start treating their customers with CUSTOMER Service AND KINDNESS..OR BYE BYE...