'RushCards' can't be blamed for black credit crunch

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Prepaid cards have come under a lot of scrutiny recently, even as they surge in popularity among consumers looking for alternatives to traditional checking accounts and bank-issued credit cards.

Prepaid debit cards now represent the fastest-growing segment of the payment industry, and consumers are expected to load $552 billion onto prepaid cards in 2012, according to the research firm Mercator Advisory Group.

Despite their growth, critics says prepaid card — including the RushCard, which was created by music mogul and entrepreneur Russell Simmons — are too costly for consumers, don’t adequately disclose fees, and are misleading to the public.

Just this week, in discussing American Express’ foray into the space, USA Today declared that prepaid cards “are getting cheaper but still flawed.”

And in May, the Florida state Attorney General’s Office launched an investigation into five issuers of prepaid cards, for possible deceptive and unfair practices.

The five companies being investigated include Simmons’ company, Unirush Financial Services, LLC, along with First Data Corporation, Green Dot Corporation, Account Now, Inc.; Netspend Corporation.

One specific issue Florida authorities are looking into is whether these prepaid card companies failed to disclose various fees to consumers. Concerning Unirush, Florida officials are also exploring whether the company made false claims by suggesting that the Rush Card could help improve user’s credit ratings.

All of this leads to some fundamental questions: Namely, are prepaid cards the terrible product that detractors claim they are — or are prepaid cards a viable alternative to checking accounts and other options like secured credit cards? Also, what about some of the criticisms leveled at prepaid card issuers? Are those concerns valid? And if so, how might they be addressed?

In my opinion, prepaid cards such as the RushCard are filling a huge void in the marketplace. Are these products perfect? No. What financial product is? That’s why we have regulators, industry competition and personal choice — all of which help drive what consumers will and won’t pay for or use.

But when it comes to prepaid cards, I think the industry overall has lately gotten a bum rap. What’s really needed, from my perspective, is some basic financial education in order to assess the merits of these products — as well analyze alternatives consumers have.

Who Is Using Prepaid Cards and Why?

Once they’re loaded with funds, prepaid debit cards, can be used to withdraw money from ATMs, purchase items, or make bill payments — just like any other debit card. But prepaid cards aren’t tied to any bank account. Instead, people with prepaid cards often load money onto these cards via direct deposit payroll from their job, social security checks, or other sources.

While most prepaid cardholders often are low-to-moderate consumers, as well as unbanked customers, it’s also the case that many prepaid card users do, in fact, have traditional checking or savings accounts at a bank.

So why do they nevertheless use prepaid cards? It’s because they’re sick and tired of being nickel and dimed by bank fees. As I’ve written in the past, the average checking account is far from free for consumers. In fact, Pew researchers last month found that the average checking account in America has:

an $8.95 monthly fee

an overdraft penalty fee of $35

an overdraft transfer fee of $10

and an extended overdraft penalty fee of $25 every seventh day the account is overdrawn.

All told, Americans are going to spend a record $38 billion in overdraft fees alone in 2011.

So if we’re going to address the issue of fees, at least let’s be honest and even-handed on the subject. Let’s stop telling consumers considering a prepaid debit card “You’re stupid. You should just get a checking account because it’s free.” No, it’s not.

And what about the idea of providing greater insight into prepaid cards and the exact fees they charge? I think this is a smart and necessary idea. We can all agree that greater transparency is needed in the world of financial services. That’s just one big task before the Consumer Financial Protection Bureau when it officially launches in July.

But is anyone going to suggest with a straight face that the standard alternatives to prepaid cards, such as checking accounts, are really “transparent” for consumers?

If so, I suggest you check out that recent study by the Pew Charitable Trust. It found that the average checking account from the nation’s 10 largest banks had disclosure statements running 111 pages long. I seriously doubt that the typical bank customer is reading those disclosures – let alone understanding what they mean. It’s no wonder, then, that Russell Simmons has been vocal in saying that he’s going after disenchanted bank customers and consumers that banks don’t want. This latter sentiment has raised eyebrows with a number of financial experts and business journalists. For instance, Farnoosh Torabi, of CBS MarketWatch.com had a lengthy sit-down with Simmons and after their interview she wrote this article about the RushCard.

When Simmons opined that “banks don’t want us”, Torabi wrote: “Really? Banks don’t want us?”

I respect Torabi’s work. But since she likely earns a very nice paycheck, presumably has good credit, and probably has access to other financial options that many RushCard holders don’t, perhaps she didn’t understand the “us” that Simmons meant.

I’ve never had the opportunity to interview Simmons or even say “hello” to the man. But having had my own credit and debt issues in the past, I can see his point.

When banks fail to lend to low-income consumers, when they never open branches in certain neighborhoods, when they nickel and dime people to death, or when they deny unbanked consumers credit, how else are these actions to be interpreted? My reading of that is simple: that’s a bank’s way of saying ‘we don’t want your business; you’re not our preferred type of client.’

What about the claims, however, that the RushCard may be misleading the public by suggesting that the RushCard can help consumers boost their credit rating? According to the company’s website, customer who enroll in the free RushPath to Credit service, and make recurring deposits and payments (like rent or a cable bill) using their RushCard will get their payment data reported to participating consumer credit reporting agencies, such as PRBC.com.

I don’t see how regulators could possibly take issue with this assertion – not unless they somehow believe that places like PRBC don’t count, and that the reporting of traditional forms of credit, like a mortgage or a credit card bill, to the “Big Three” credit bureaus (Experian, Equifax or TransUnion) is the only way to help a person’s credit rating.

If that’s the case, these regulators are about to upset not just the folks at Unirush, but an entire industry that’s trying to bring the nation’s estimated 50 million-plus consumers with “thin” or no credit files into the credit mainstream.

You see, PRBC once stood for “Pay Rent, Build Credit.” The acronym was later changed to “Payment Reporting Builds Credit” and in 2010 PRBC was acquired by a business called Microbilt.

PRBC has been around for years and its sole reason for being is to help unbanked consumers and those with non-traditional payment accounts — like monthly daycare bills or utility bills — to develop a credit track record. PRBC’s data is used by Fair Isaac, creators of the FICO score, to create something called a FICO Expansion score, which evaluates non-traditional payment data.

So if the RushCard is “misleading” anyone by suggesting that they can help people with “thin” credit files to establish a positive credit rating, then so too is PRBC, Fair Isaac and the credit bureau Experian — which now tracks rent payments. All of these institutions (and many more) tell unbanked consumers and those with thin credit files that making on-time payments for things like cell phone bills or rent can help them build a positive credit rating.

It’s easy to attack a business stepping up to offer a product or service that’s not well understood nor in the mainstream. But if critics are going to do that, at least offer a viable alternative. Right now, many users of prepaid debit cards simply don’t feel like they have that option in most traditional banks. These simple facts, along with hefty bank fees, are driving consumers straight into the arms of prepaid debit cards.

This is particularly true among minorities.

For example, in conducting a survey “The African-American Financial Experience,” Prudential Financial recently polled 1,500 blacks between the ages of 25 ad 70 and with incomes of $25,000 and above. One of the questions Prudential asked was: “Has any financial services company effectively engaged and shown support for the black community?,” The responses: 78 percent of African American respondents answered “No.” But when purchasing a financial product from a financial services firm, 94 percent said earning trust is either critical or very important.

It just goes to show you that mainstream financial institutions have a long way to go to earn the trust — let alone the business — of many in the African-American community and beyond. Until they do, prepaid card marketers will continue to thrive.