In just a few days, the Consumer Financial Protection Bureau’s new rule covering prepaid debit cards will go into effect. When it does, NetSpend cards will officially cease to have the ability to charge overdraft fees.
While NetSpend was not the only prepaid debit card with an overdraft, it was far and away the largest provider offering the service. NetSpend is America’s second largest program manager of general-purpose reloadable prepaid debit cards. Before TSYS purchased it in 2013, NetSpend’s public filings to its shareholders showed that the company had several million accounts. In 2012, approximately 46 percent of active NetSpend accounts received a deposit. NetSpend banked many people.
In turn, NetSpend banks many overdraft fees. TSYS would not have paid $1.4 billion for NetSpend if it didn’t expect to see large returns on their investment. To put that into context, if NetSpend had 4 million accounts (includes GPR and payroll cards) at the time when the purchase was executed, then TSYS paid $350 for each card account. It is not fair to say that all of the value lied in its accounts. Plenty of NetSpend’s value resided in its technology platform, its share of MetaBank’s common stock, its experienced workforce, and its exclusive agreements with its check cashing partners. On the other hand, the company had $80 million in outstanding debt.
If you pay $200 to get an account, within the knowledge that each new account will probably cost about $5 a month to manage, then you are looking at an investment of $210 in year one. True, it is likely that many of those accounts remained open for more than one year and that would allow TSYS to amortize those acquisition costs over more than twelve months. Nonetheless, the typical lifespan of a prepaid debit card is far less than that of a traditional checking account. NetSpend would probably be happy with an average account lifetime of one year.
OK – so if the one year cost if $200 (rounding) and the monthly fee on a NetSpend card is $8.95, where does a company make up the difference? Maintenance fees cover slightly more than half of that cost.
• Interchange fees
• Transaction fees from pay-as-you-go accounts
• Monthly maintenance fees for monthly and annual service plans
• Customer service fees – balance inquiries.
• Inactivity Fees
• Bill payment fees
• Customization of cards. NetSpend offered a variety of celebrity-themed cards.
• Card-to-card transfer fees.
• Overdraft fees
In 2012, the company derived 22 percent of its revenue from interchange ($68.5 million) and 76 percent ($232.9 million) from the remainder of the fees listed above.
OK – so I admit now that NetSpend had many different ways to earn revenue. The revenue wasn’t coming only from overdraft fees. The company was charging account holders at every point of interaction.
However, overdraft charges have always constituted a large portion of NetSpend’s business. In 2017, TSYS said that the CFPB’s new restrictions on overdraft would sap $80 million in revenues from its top line.
Side note: Can you see how much different WiseWage’s cards are from NetSpend cards? We offer no-fee cards. With all of our cards, there are no monthly fees, no minimum balance fees, and no overdraft fees. That’s a promise.
Back to the prepaid card rule:
The new rule moves the entire prepaid debit card product to a better place.
Here is a top-level summary of the protections in the new rule:
• Going forward, prepaid debit cards will come with a uniform set of disclosures.
• They will have full protection under the Electronic Funds Transfer Act, resulting in a situation where there are clearly articulated rights for cardholders to contest fraudulent activity or to seek remedies for a chargeback.
• Account holders have a right to some basic account information for free – including access to your account balance by telephone.
• The CFPB will maintain a publicly-available catalog of fee schedules and account agreements.
• A warning must be given to the consumer must if funds held in the account are not FDIC-insured.
Notably, the rule does not place an outright ban on overdraft fees. However, it does put restrictions in place that should have the practical effect of eliminating them from the platform. Prepaid card companies will have to underwrite an account holder before it can extend an overdraft service. A key aspect is that the company will have to wait at least thirty days after the card is activated before it can accept a request from the consumer to have the product. Additionally, there are limits placed on the number of overdraft fees consumers can pay in the first year.
One thing to look out for: it is possible that prepaid card program managers will try to evade the rule by re-designing their services as checkless checking demand deposit accounts.
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