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?
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