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New prepaid debit cards target niches or aim to replace bank accounts

McClatchy-Tribune Information Services

December  28, 2015


When Steve Streit conceived the prepaid debit card, he had something very specific in mind: a way to let kids spend money online without using a parentís credit card.

He didnít imagine that 16 years later the cards would be used by tens of millions of lower-income Americans to manage their money ó or that a bevy of small rivals would offer new products on top of the prepaid system he pioneered.

"Itís much bigger than we thought it would be," said Streit, the founder and chief executive of Pasadenaís Green Dot Corp., one of the nationís top prepaid card issuers. "And itís still very early on."

The cards are targeting an assortment of niches ó as varied as Uber drivers and business owners who want to restrict employeesí corporate spending. Others have broader business models and are trying to use prepaid products to replace bank accounts, especially for millennials who may have no tied to traditional banks.

But unlike Green Dot, which boasts that it invented the prepaid card industry, most new firms are going out of their way to call themselves technology companies, perhaps partly because of the stigma that comes along with the prepaid industry.

The cards have long been decried by consumer advocates who argue they come with too many fees and too few consumer protections.

Last month a new wrinkle arose when technical problems at RushCard left thousands of customers without access to their money for more than a week.

But the market is too big and fast growing to ignore. Mercator Advisory Group, which tracks the industry, estimates that Americans will load $100 billion onto prepaid cards this year, up from about $57 billion in 2011.

And for entrepreneurs there is another attraction: Startups can offer prepaid cards without becoming banks.

The companies need only to build their websites, tools and apps, and focus on marketing. The more complicated and more regulated back-office functions of handling customer deposits and payments are left to banks that specialize in working with prepaid card issuers.

"Prepaid has created a platform that allows you to very quickly test a new product and get it into the hands of consumers," said Andrew DíSouza, founder of Toronto start-up Clearbanc, which in October launched a product built specifically for Uber drivers and other workers in the gig economy.

For example, drivers can link Clearbanc to their Uber accounts and, for a $2 dao;u fee, get paid daily instead of weekly. The company hopes to offer the service to customers who work for Uber rival Lyft, delivery service Instacart and others.

It also offers to set aside money for income taxes ó freelancers donít have employers to withhold taxes for them ó and has budgeting tools that show how much more they need to work to hit monthly income goals.

"The way other tools are set up, itís ĎHereís my monthly income, whatís the best way to allocate it?í" DíSouza said. "With Clearbanc, itís reversed: ĎHere are my monthly bills, how much do I need to work?í"

Two other firms, both in San Francisco, are targeting their prepaid products to businesses.

Karmic Labs, which was founded in 2013 and launched its product Dash this year, gives business owners a single account connected to several prepaid debit cards that different employees can use to make purchases.

An employee might get a monthly allowance ó for paying for lunch with clients, for example,ó or one-time balance transfers to cover particular expenses, such as travel for a conference.

One common feature for nearly all prepaid debit cards is that, unlike with a debit card linked to a bank account, itís impossible to overdraw. And unlike a corporate credit card, employees can spend only as much as their boss has put on their card.

"Itís a safety box of funds thatís separate from your other accounts," said Karmic CEO Ryan Weidenmiller. "Employees wonít have access to all the money in your main bank account. Prepaid is perfect for that."

Bento for Business, which also launched its product this year, has a similar model, with a few twists. A business owner can set daily, weekly or monthly spending limits for each debit card, and can also limit the types of businesses where cards can be used.

That might restrict a delivery driver to making purchases at gas stations, said Bento CEO Farhan Amhad.

Other startups are casting themselves as alternatives to banks, especially for millennials ó 45 percent of whom owned prepaid debit cards as of 2013, according to a report cited by the Federal Reserve Bank of Philadelphia.

In an era when most checking account funds are accessed through debit cards, they argue thereís little difference between a prepaid account and a checking account. Some prepaid companies even charge lower fees than banks.

Simple, a Portland, Ore., firm that was acquired last year by Spanish bank BBVA, started out as a prepaid card meant to replace checking accounts. It charges no fees, and it offers customers savings, budgeting and money-tracking tools online and through a mobile app.

In contrast, Wells Fargo charges a $10 monthly service fee for basic checking accounts unless customers make at least 10 debit card purchases, maintain large balances or have at least $500 in direct deposits going into each account every month.

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West L.A.ís Card.com, a bank alternative founded in 2012, charges a monthly fee of $5.95, but thatís waived for customers who make at least $800 in direct deposits a month. Customers can deposit checks using their smartphones, set up direct deposit and get cash at thousands of ATMs.

Ben Katz, the companyís founder, argues most people donít need paper checks, tellers or branches.

"Branch banks donít make sense," he said. "Thereís a reason we donít have Blockbuster Video everywhere anymore."

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Consumer advocates remain wary of the industry.

Christina Tetreault, a staff attorney with Consumers Union, notes that prepaid cards often lack the deposit insurance and fraud protection that are standard for bank accounts.

"It shouldnít be up to the consumer to hunt through the fine print to find out if their funds are protected by deposit insurance," Tetreault said.

The startups may have even more fundamental business challenges.

Arjan SchŁtte, founder and managing partner of Core Innovation Capital, a Hollywood venture capital firm that invests in financial technology firms, said most have had only limited success in tapping into the markets they hope to serve.

"Having looked at enough of these, Iím much more bearish," he said. "Most startups arenít doing it at any material scale. The ones Iíve seen are all tiny and not getting a ton of traction."

In part, thatís because he thinks the financial needs of different customers are not so unique that they warrant specific products. Put another way, Clearbanc might offer nifty tools for Uber drivers, but those same drivers can probably find some other way to manage their money.

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Green Dotís Streit agrees.

His company is about to launch a new kind of account geared toward small-business owners and independent contractors, but it wonít be trying to offer narrowly tailored services that Clearbanc and other firms provide.

GoBusiness will be a business checking account ó Green Dot, unlike other prepaid firms, also owns its own bank ó that customers can sign up for online. The idea, he said, is to serve not only the Uber driver but also the Etsy seller or farmers market merchant who wants a business account but doesnít need other traditional bank services.

GoBusiness account holders will get discounts at office supply stores and other places where small-business owners shop, Streit said, but donít expect features aimed at freelancers who work for specific firms.

Unlike a start-up that experiments with niche offerings, Green Dot wants to make products that appeal to big audiences. Itís the only way that the company ó which brought in more than $600 million in revenue last year ó can find meaningful growth.

"You need a hit record," said Streit, a former radio disc jockey. "You have to focus on things that can move the needle. I canít take the time of 100 developers and compliance officers to develop a product that can only sell three copies."