What the Kardashians and the US Treasury [Don’t] Have in Common

An estimated nine million households – about one in every 12 – don’t have bank accounts. With little to no access to traditional financial services, these “unbanked” households are limited to high-cost check cashing and payday lending outlets for their routine transactions. (Don’t worry – we’ll get to the Kardashian bit in just a minute!)

To simply cash a check, unbanked consumers pay anywhere from 1% to 4% of the check amount. Taking out loans gets even pricier; it’s not unusual for a three hundred-dollar loan from a payday lender to come with a 400% interest rate. When these check cashers and payday lending services are used regularly for just a few weeks, the exorbitant fees can easily drain household income and significantly impair people’s ability to save money and build financial security.

The good news is that the US Treasury Department has launched an innovative pilot program designed to nudge unbanked, taxpaying consumers towards low-cost financial products. As part of the new program, the Treasury Department has sent out letters to 600,000 low- and moderate-income taxpayers, offering them the option of signing up for a special Visa prepaid debit card, which provides features that are similar to those of a standard checking account.
Individuals with this particular debit card will have access to direct deposit, both from their employers and from the IRS (for future tax return purposes). They will also be able to use the debit card for ATM withdrawals at select machines and to make purchases at no additional cost. Of the 600,000 offers for prepaid debit cards sent out by the US Treasury in January, half of the cards will have a $4.95 monthly fee.

By using a variety of messages and offering different account features, Treasury officials hope to gain insight on which approaches are most effective at encouraging consumers to take advantage of existing low-cost financial products.

The US Treasury Department’s approach is commendable and somewhat controversial, considering the fact that the booming prepaid debit card industry is mired with high-cost and even predatory products. The most recent and infamous example of a high-profile predatory product was the Kardashian Kard, a prepaid debit card endorsed by stars of the reality TV show “Keeping Up with the Kardashians.” The card targeted teenage girls and saddled their parents with the hefty bill: a one-time $99.95 fee just to own the card for 12-months, a card purchase fee of $9.95, and twelve monthly fees of $7.95. Plus, a Kardashian Kard user would pay $1 every time she added money to the card, $2 for any automatic bill payment per transaction, and $1.50 to speak to with a live operator.

After a week of bad publicity sparked by the exorbitant fees, the Kardashians withdrew their endorsement of the product.

And the Kardashians aren’t the only ones getting hit by the wave of criticism associated with prepaid debit cards. Russell Simmons, owner of UniRush, recently announced that fees on the RushCard would be falling substantially. Prior to the fee changes, customers of RushCard paid $19.95 to purchase the card, along with a $1 fee for every time they used the card (up to $10 a month) and $1.95 for each time they used an ATM.

Currently, prepaid debit cards are the least-regulated financial product on the market. With banks no longer able to make profits the old way, the prepaid debit card market is booming with new products targeting vulnerable populations: young teenagers and adults, unbanked individuals, low-income households, and people with poor credit histories. Policymakers and advocates should bolster their monitoring efforts, keeping a watchful eye out for trendy cards racked with fees and usurious interest rates. In the meantime, consumers should think twice – and shop around – before settling on a new prepaid debit card.

And the US Treasury? Now’s the perfect time to educate Americans on distinguishing smart prepaid debit cards from predatory ones. We got the ball rolling for you, Treasury – now it’s your turn!

Until next week,

Sunaena Chhatry
Policy Manager

Photo credits: futureatlas.com and david_shankbone