Squeezing pennies: Big profits from pre-paid debit cards, payday loans
Filed under: Columns, Earnings
With all the Nobel Prizes being awarded this week, I am reminded that Mohammed Yunus won the Nobel Peace Prize in 2006 for founding Grameen Bank, a micro-lender to the very poor. Yunus's idea was to use finance to help needy people in Bangladesh dig themselves out of poverty.
But micro-lenders in developing nations aren't the only ones addressing the financial needs of people who are too poor to access the mainstream banking system. Visa (V) and MasterCard (MA) have their own version of micro-lending -- though one that is unlikely to receive any awards. Instead, they lend out small amounts on their co-branded, pre-paid debit cards, which are sold largely to the working poor in the U.S., and then collect millions in fees and penalty charges.
What is a pre-paid debit card? The New York Times reports Tuesday that people buy them at drugstores and mass merchandisers in denominations of $25, $100 and $500. Consumers pay for the cards in stores to give them access to cash for ATM withdrawals, store purchases and ecommerce. In that way, the cards help enable commerce for a wider group of consumers.
There's just one little thing: fees. Or more specifically, lots of little fees -- for example, some cards have a $9.95 activation fee; $1.75 for each ATM withdrawal; $1 per ATM balance inquiry, 50 cents per purchase, $4 for monthly maintenance, $2 for inactivity after 60 days and $1 to call customer service. Somehow I doubt Grameen Bank charges fees like that.
This sector of the banking industry is growing fast. The Times reports that in 2008, prepaid debit purchases totaled $8.7 billion -- 125 percent more than in 2007. And by 2012, consumers are expected to purchase about $119 billion worth.
These pre-paid cards are co-branded with obscure companies that issue the cards, with names like Green Dot, NetSpend and AccountNow. But Visa and MasterCard -- who have their names on the cards as well are getting their share of the action -- receive between five and 20 cents each time a consumer or register operator swipes them. Who knows the regulatory and/or marketing reasons why these big name companies don't issue the cards all by themselves.
Needless to say, only the poorest or least knowledgeable people would agree to such a lousy deal. And these cards are also popular among those who are in this country illegally or lack U.S. citizenship.
These prepaid debit card companies are not alone in preying on the poor. Wealthy investor Thomas W. Smith owns big stakes in two companies that profit from the poor, payday lender World Acceptance Corp. (WRLD) and legal insurance provider Prepaid Legal (PPD). As I wrote in 2003, Prepaid Legal, in which Smith owns 488,434 shares, makes its money through associates who recruit other associates trying to sell legal insurance -- mostly to poor people, who are convinced that it's smart to buy insurance against legal fees.
Prepaid Legal just received a subpoena today from the SEC, related to its stock trading program and its membership statistics, and its stock plunged as much as 21 percent.
Smith is also a big shareholder in World Acceptance, a major payday lender. Specifically, he owns 1,076,020 shares in the company which, as I noted, charges interest rates as high as 140 percent for loans in the $300 to $1,000 range. For example, payday lenders typically charge $2 for every $20 borrowed. Based on a 30-day repayment period, that's 120 percent annual interest earned lending people money against their weekly paychecks.
There are different ways to bank the poor. And I'd be surprised if either the people who benefit from prepaid debit cards, prepaid legal services, or payday lending will win any Nobel Prizes for their way of banking the poor.
Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
10-07-2009 @ 9:43AM
Regis said...
People who rip off poor people need to have their balls cut of, or whatever the person who gets ripped off feel like doing to them. Im a disabled person, never got ripped off, almost did but homey not that unfortunate, ok ya got me pissed off now. That is just cruel.
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10-06-2009 @ 9:08PM
Patricia said...
I will be the first real post here. As far as payday loans, they are the worst thing in the world. I have known so many people who have gone into ruin because of these loans. They do prey on the poor and charge crazy fees and want the money in one shot not in payments like a regular loan.
As for debit cards, I have a green dot black card and I love it. Because I have direct deposit my fees are waived each month and because I have the black card with an annual fee of $19.95 I have no ATM fees if I use their bank one of them is Chase. I have never been charged a fee for transactions and just last month they added bill pay to their service. I am on a budget and this card allows me to keep my budget on track.
So knock the payday loan but don't knock the debit card.
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10-07-2009 @ 3:46AM
Darrell Mayeda said...
Patricia,
If you read carefully, it is only this one catagory, prepaid debit cards, these aren't the same thing as the debit cards that come from reputable, or trustworthy banks that might be getting hard to find. check out a couple of other stories about the fees legitimate banks charge.
10-06-2009 @ 9:27PM
walmartwillysez said...
And now you can add Walmart to the group of unscrupulous bankers. They are even ripping off their own employees with these predatory cards. They have come up with this brilliant scheme to get employees who do not or cannot get direct deposit for their paychecks to accept their wages in the form of deposit to these "stored value" cards for which they collect fees for usage. This is unreal. Charging their employees to pay for their paychecks. And they say their first corporate belief is "respect for the individual". And to this I say "bull$hit". The only thing they respect is their next almighty dollar even at the expense of their own employees.
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10-06-2009 @ 10:21PM
elizabeth said...
so is Wendy"s If they don't have a bank account they have to take their payday in a pre paid card which cost them all of the fees you were taking about doe not sound legal to me
10-06-2009 @ 9:28PM
Ray said...
Anyone wasting money on these fees is fooling themselves
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10-06-2009 @ 9:34PM
bev said...
Thing to remember is ALL CREDIT CARDS ARE IN BUSINESS TO MAKE MONEY. NOT TO HELP YOU BUT TO HELP THEMSELVES. DON'T USE THEM UNLESS YOU ABSOLUTELY HAVE TO.
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10-06-2009 @ 10:16PM
mezl said...
much cheaper to put money- as little as one or two hundred dollars- into a checking account. get your debit card for free, or at minimal cost, and there's no monthly fees. no bills, either, because when you use the debit card, the money comes right out of your account. much better that way. and as long as you use the atm at the same bank from which your card was issued, no fees for using that machine. not yet, any way.....
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10-08-2009 @ 7:56PM
MAL said...
YES!!! you got the real story. and keep going and you will find where the cards even pay you!
10-06-2009 @ 10:26PM
Martin Wilcoxson said...
I have a Netspend Prepaid Debit card. I had trouble with credit cards in the past. With Netspend I pay a small fee for the ability to buy things over the internet. I don't have to worry about running up a big bill that I can't pay. Fine with me.
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10-11-2009 @ 2:10AM
Franklin Shepardson said...
I have the same cards but I don't know why their is so many folkes still messing with any other card but NetSpend.U smart man,ty. Franko #16
10-06-2009 @ 11:35PM
Sheila said...
I had a Green Dot card until recently. Due to long-term unemployment and out-of-this-world fees that caused me to lose my checking account, I was placed in Checksystems. This means banks will not accept you as a depositor. However, my new employer required that everyone use direct deposit. I was able to sign up with Green Dot and get a place to accept my paycheck. Direct Deposit meant no fees. All is well now, but I could not have gotten back on my feet wthout them.
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10-07-2009 @ 12:23AM
mommysnrn said...
mezl, nice if you can get a checking account, even nicer if you can get a debit card on your account. Unfortunately, not everyone can if you don't have great credit. Also, If you get overdrawn on your account (bank fees are a big culprit here also) then you incur even more fees. Another problem with a bank debit card is if it is stolen or used by someone else, your entire account can be wiped out before you know it. This happened with my ex, and I never got the money back. Prepaid debit cards are a great alternative, but you can't rent a car with them.
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10-07-2009 @ 1:12AM
dee said...
mommysnrn: The banks don't do a credit check to get a debit card! They're free. I bank all of my money and use my debit card. I use it as credit so I don't get charged fees and I never sign the back. This way you have to show I.D to use it. If it gets stolen call the bank immediately and they cancel it. I've never had overdraft fees. It's a matter of using Common Sense.
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10-07-2009 @ 1:23AM
b s richardson said...
if your debit card (or most others) is stolen/lost you are not held liable for losses. This includes charges and withdrawals. Best to check all incoming invoices to check on recent useage, as speed to report is of the utmost importance. Some have limits (30/60 days) to report losses.
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10-07-2009 @ 1:56AM
Greg Persky said...
Linking Prepaid Legal in here is ridiculous - Prepaid Legal is only second to McDonalds in the number of millionaires it has created and the books are open for all to see on the NYSE. As usual people that comment on the company that are not familiar with the company have no idea what they are talking about. Plenty of six figure earners that have willingly joined Prepaid Legal and see the value in the opportunity they give people and their emphasis on personal development.
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10-07-2009 @ 2:56AM
Franklin Shepardson said...
I have NetSpend's debit card and i am so happy with it.Cost me $1 per trans action and 50 cents for asking for a balance.I get a full report on all purchases.Does your debit card do that.Didn't think so.
tr
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10-07-2009 @ 4:29AM
Annais said...
My husband and I have been using Green Dot cards for 2 or more years now and they have never done us wrong. Unlike BofA which ripped both of us off for quite a while. Green dot doesn't even charge us a monthly fee because we deposit a certain amount of money into our account each month. And what's nice is that we can withdraw money from our local Safeway ATM free of charge! I think it's sad that this article lumped this great company into one that includes pay day loans...way different!
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10-07-2009 @ 7:22AM
cgw said...
It's a shame articles aren't being written about how banks (Bank of America) screw their business customers over as well with these fees. do people realize that each time they use a card the business owner pays the bank up to 3% on each purchase and another percentage at the end of the month. On each ten dollars spent between the business and the customer nearly 20% goes to the bank issuing the card, let's not forget what the government gets. But the banks are the ones failing? At least now we know why BofA is so large. They are equal opportunity screwers gaining financial weight on the backs of both business and consumers. That is one bank I would love to see tank.
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