A little celebrity competition may be good for the prepaid card market.
Hip-hop mogul Russell Simmons said Thursday that he plans to trim several fees on his prepaid card, which works like a debit card but isn't linked to a checking account. The announcement comes just weeks after financial guru Suze Orman introduced a prepaid card of her own.
Simmons said the fee cuts are simply the result of rapidly growing demand for his RushCard. He said the bigger profit margins have given him flexibility to cut fees and roll out new services.
But he noted that Orman's entry in to the market should only fuel that growth — and push fees down further.
“What Suze Orman and other celebrities are doing is educating customers about this alternative,” Simmons said.
The RushCard, which has been criticized by consumer advocates for its fee structure, will still be more expensive than several popular prepaid cards on the market even after the fee cuts take effect in the next two months.
But Simmons said that pricing is not his only concern.
“I don't think my job is to be cheapest,” he said. “I want to be the iPhone of this business.”
That means continually offering new features. For example, RushCard customers have access to an online budgeting tool and can now get a two-day advance on their direct deposits at no cost. Simmons said he's also working to offer payday loans a week in advance at far cheaper prices than those charged by payday lenders.
He said those services will continue to attract customers, even if his card costs a little more.
The RushCard is not a public company, so its finances aren't available for review. But without giving details, Simmons said demand has skyrocketed in recent years.
That echoes the exponential growth in the broader prepaid market. This year, consumers are expected to load $120 billion onto prepaid cards, up from $71 billion last year and $42 billion in 2010, according to the Mercator Advisory Group.
The industry was previously dominated by smaller companies that served customers who did not have traditional credit cards or checking accounts, and therefore had to carry cash and couldn't make purchases online. With the downturn, however, issuers have increasingly been pushing prepaid cards as a way to control spending and avoid paying interest. Capital One and even American Express, which typically targets an affluent client base, recently began offering prepaid cards.
But prepaid cards often have fees that can eat into balances.
It costs between $4 and $15 just to buy the RushCard, depending on the card design selected. That does not include the money loaded onto the card. There's also a $10 monthly fee, making the cost at least $120 a year. Customers can also run into other fees, including for ATM withdrawals and purchases made by punching in PIN codes.
Starting next month, Simmons plans to cut fees for bill pay enrollment, bill pay transactions and replacement cards. In March, Simmons said he'll offer cardholders an $8 monthly fee option, or $6 if cardholders set up direct deposit.
Such fees have been criticized by advocates for the poor, who say cardholders would be better off with traditional checking accounts. The Kardashian sisters of reality TV drew attention to the issue when they endorsed a prepaid card that cost $60 just to buy and use for six months, not including money loaded onto the card. The sisters quickly cut ties with the card following heavy criticism.
But even prepaid cards with far lower fees are not as cheap as traditional checking accounts can be, said Michelle Jun, a senior attorney with the advocacy group Consumers Union. She also noted that checking accounts have the added benefit of helping customers build relationships with banks and opening up access to other financial products.
Prepaid card issuers counter that checking accounts can cost far more in fees, however, particularly for customers who tend to incur multiple overdraft charges. Simmons also noted that many RushCard customers would not be able to meet the minimum balances required by banks in order to have monthly fees waived.
Simmons also says critics don't understand the challenges faced by prepaid card users, who otherwise would be waiting in line at check cashing stores to access their money. In many cases, he said prepaid card users simply cannot get a checking account because of their poor financial histories.
“Banks don't want these customers,” he said. “That's why hundreds of thousands of people are migrating to our form of banking.”
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