By Patti Murphy
ProScribes Inc.
Reloadable prepaid debit cards have made inroads with U.S. consumers, but by all accounts usage is still overshadowed by other types of payments. And then there are the legal problems: efforts to get employers to issue prepaid cards for payroll have come under fire in at least two states.
Meanwhile, the U.S. Department of the Treasury is on the hot seat over costs associated with Direct Express, a prepaid card program for doling out federal benefits to unbanked recipients.
Bloomberg News reported on July 3, 2013, that the New York Attorney General's (AG's) office is investigating whether the fees for transactions using payroll cards (like for ATM withdrawals) unfairly diminish the take-home pay of employees paid via the cards.
The report, which quoted documents obtained from the New York AG's office, said McDonald's Corp. and Wal-Mart Stores Inc. were among the employers being investigated.
At about the same time, a class-action lawsuit was filed in Pennsylvania against McDonald's arguing that the fast-food chain's payroll card program violates state laws requiring workers' wages be paid in cash or by check.
And according to Selling Prepaid, Treasury Department officials were grilled by a Senate subcommittee last month regarding a $30 million payment made to Comerica Bank. Comerica manages the Direct Express prepaid program for Uncle Sam and had originally said the program would pay for itself.
Apparently, the bank's calculations were off, so the Treasury Department paid the bank $30 million to make up for a revenue shortfall, according to testimony from the department's Fiscal Assistant Secretary Richard Gregg. Members of a Senate Banking subcommittee balked; and they're not alone. Gregg admitted the payment to Comerica is being investigated by Treasury's Inspector General's Office.
Prepaid cards are a huge and growing market, and payroll and benefit cards represent a significant share of that market. Wal-Mart and McDonald's are among the largest employers requiring that employees be paid via prepaid card if they don't want to be paid by check and either can't or won't accept direct deposit. The problem for employees: card use fees, like those for ATM withdrawals, checking card balances and cash back transactions.
According to the Bloomberg report, New York law requires an employee's advance written consent to be paid by prepaid card, and people cannot be compelled to accept pay via the cards as a condition of employment.
The AG's office has asked employers, among other things, to calculate how much money in fees is being deducted from employees' payroll cards and explain how they disclose those fees.
The consultancy Aite Group LLC estimated that $42.8 billion will be loaded onto payroll cards this year, which represents 38 percent of the estimated total of all prepaid card loads. Aite also estimated the compound growth rate for all reloadable prepaid cards (including payroll cards) will be in the 20-percent-a-year range through 2016.
As impressive as this may appear, it is but a sliver of the trillions of dollars a year spent worldwide using all types of general purpose credit and debit cards, and cash.
Here is an additional glitch: the millennial generation. Prepaid debit cards may have appeal to these young adults - they make up about 40 percent of total prepaid cardholders - but as a group, they aren't yet dominant economic players.
"Millennials are having a tough time of it," the research and consulting firm Market Platform Dynamics LLC observed in a recent paper. They may be big users of smartphones and prepaid cards, but they're also cursed with high unemployment rates. The result is that older Americans - the baby boom generation - continue to drive economic growth.
The report, titled Payments Innovation and the Use of Cash: Will Cash Really Die, and if so When?, stated that in the United States, "baby boomers will control 70 percent of all disposable income in the next five years and today drive about half of all consumer package goods spending."
It also noted that even though boomers, as a generation, have lost some economic ground since 2008, their overall net worth is three times that of millennials. And people who are 55 and older control about 75 percent of the overall wealth of the United States.
"This dynamic is important because even if the millennials develop a new way of paying at the point of sale, it won't likely have much of an impact right away - they just don't have the spending power as a group to shift payment methods as a percentage of spending, which is what drives overall change," the report stated. That's one big reason why cash isn't going to die, certainly not in our lifetimes. "The bottom line is this: cash is declining in many countries, but as a result of economic growth, real spending in cash still increases. Payments innovation is cutting into cash use - but it is happening very slowly," the report concluded.
Slow growth or not, payment companies are seizing opportunities they see in prepaid debit card programs. Total System Services Inc. (TSYS) entered the market, paying $1.4 billion for prepaid card company NetSpend Corp., in a deal that was recently finalized. Philip Tomlinson, Chairman and Chief Executive Officer of TSYS, described the acquisition as "truly a transformational event for TSYS."
Paul Bridgewater, TSYS Group Executive of Global Product, and Dan Henry, then NetSpend CEO, discussed the deal at the Underbanked Financial Services Forum last month, and how TSYS plans to leverage prepaid in its other lines of business, like credit card issuing services.
American Express Co. was also at the Underbanked Forum, talking about Bluebird, a prepaid debit card it issues with help from Wal-Mart. Alpesh Chokshi, President of Global Payment Options at AmEx, said Bluebird is part of a bigger plan to "open up" the AmEx brand to a larger market.
"We're just getting started," he said. And Chokshi suggested that AmEx will be taking cues from millennials as it seeks to grow the brand. "We have no predefined roadmap," he said. "We're looking at what our customers say they want." he said, noting that 45 percent of Bluebird customers these days are under the age of 35.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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