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Stored Value Cards: An Alternative for the Unbanked?
July 2004
  • Stored value cards are one of the most dynamic and fastest growing products in the financial industry. Anyone who makes purchases with a merchant gift card, places phone calls with a prepaid telephone card, or buys goods or services with a prepaid debit card is using a stored value card. Certain types of these cards are being heavily marketed to lower-income consumers, especially the unbanked or underbanked. Although these cards may provide consumers with a more effective means of accessing funds and making financial transactions than cash, consumers need to be aware that these cards come with a vast array of features, fee structures and levels of consumer protections. This article highlights many of the principal features of these financial innovations and identifies important aspects of these cards that consumers must be aware of in order to make informed decisions about the products that best meet their financial needs.

Stored value cards provide a way to make financial transactions. Stored value cards use magnetic stripe technology to store information about funds that have been prepaid to the card. Payroll cards, government benefit cards, prepaid debit cards, gift cards, and telephone cards are examples of stored value cards. There are two main categories of stored value cards in the marketplace. The first prepaid cards made available to the marketplace were single-purpose or ‘closed-loop’ cards. Gift cards, which can only be used to purchase goods at particular retailers, and prepaid telephone cards, which can only be used to make telephone calls, are examples of single-purpose cards. The second type of card to emerge was a multipurpose or ‘open-loop’ card, which can be used to make debit transactions at a wide variety of retail locations, as well as for other purposes, such as receiving direct deposits and withdrawing cash from ATMs. Some multipurpose cards are branded by Visa or MasterCard and can be used wherever those brands are accepted.

Consumers obtain stored value cards in a variety of ways. They may obtain a payroll card from an employer, an electronic benefit card from a government agency, or a gift card from a retail store. Typically, a consumer would apply for a general spending multipurpose card by telephone or online, although these cards may be increasingly offered at check-cashing outlets, money transfer company locations, and retail stores.

The stored value card market is growing and evolving rapidly. According to industry estimates, more than 2,000 stored value programs are available, with roughly 7 million Visa- or MasterCard-branded stored value cards in the marketplace. There are approximately 20 million users and that figure is expected to more than double to 49 million users by 2008. In 2003, stored value cards were used to make $42 billion in transactions. By 2006 over $72 billion in stored value transactions are expected. Experts put this industry in the introductory or early growth stage of the product life cycle, suggesting that there is substantial growth potential in the years ahead1. These industry figures include all stored value cards, such as multipurpose general spending cards, payroll cards, government benefit cards, child support payment cards, merchant gift cards, and telephone cards.

Reloadable multipurpose cards are often viewed as alternatives to checking accounts. Among stored value cards, reloadable multipurpose cards most closely resemble traditional deposit account debit cards in functionality and are thus most likely to meet the needs of the unbanked or underbanked. Consumers not only can use these cards to make payments to a wide variety of merchants and service providers but also can reload them with additional funds. The ways in which cards can be reloaded vary but may include direct deposit, money wire transfer, money order, or cash presentment at designated retail locations such as convenience stores.

Reloadable multipurpose cards are offered by a variety of firms and have an assortment of features. Some cards are both issued and distributed by banks, while others are issued by banks but distributed to customers by nonbank firms. Nonbank firms may also play roles in processing card transactions. Some cards are Visa- or MasterCard-branded, allowing them to be used wherever these bank association cards are accepted.

Cards may offer any or all of the following functions: direct deposits of payroll checks, withdrawals of cash at ATMs, payments for retail purchases, bill payments, and money transfers. Some cards require the cardholder to enter a PIN (personal identification number) at the point of sale, whereas others require the cardholder’s signature. Credit-building features, in which accounts in good standing are reported to one of the credit bureaus, are offered by a few card issuers, although the degree to which such features actually influence a customer’s credit score is still unclear. There is some preliminary discussion among industry representatives about the feasibility of adding overdraft protection or payday advance features; for example, cardholders would pay a fee to receive a loan advance from their next payroll deposit. Here, again, the net benefit to cardholders is unclear.2

Consumers need to be aware of how these cards work and the fees they will incur. Given the wide range and complexity of card types and features, consumers must weigh the benefits of these features against the additional costs incurred. Below are some of the primary categories of fees and the ranges of fees that may be charged3. Cards that have relatively high fees in one category often tend to have relatively low fees in another category; for example, higher monthly fees are often associated with lower or no transaction fees.

Table 1: Basic Fee Categories

 
FEE TYPE
FEE RANGE
 
 
Entrance/Activation
$0 to $39.95
 
 
Maintenance
 
 
     Annual
$0 to $99.95
 
 
     Monthly
$0 to $9.95
 
 
Point of Sale
$0 to $2.004
 
 
Domestic ATM Transaction (within network)
$0 to $2.50
 


Other potential fees to look for include:

  • Transaction limit fee
  • Bill payment fee
  • Phone or online transaction fee
  • Reload fee
  • Money transfer fee
  • Out-of-network domestic ATM transaction fee
  • International ATM transaction fee
  • Inactivity fee
  • Overdraft fee
  • Overdraft protection fee
  • Payday advance fee
  • Credit-reporting fee
  • Dispute fee

Consumers should also pay attention to whether or not their financial transactions generate dual fees. For example, while the company offering the card may not charge a fee to the consumer for reloading the card, there may be a charge from a third-party, such as a retail store or a check cashing business, that accepts and loads these funds.

Whether a stored value card makes financial sense for a consumer depends on how the consumer expects to use the card. Consumers should carefully examine the fee structure of different stored value card products and calculate the expected monthly costs for each card based on the kind and number of transactions they foresee making. They should also compare the costs and benefits of using a stored value card in lieu of holding a checking account or using alternative financial service providers such as check-cashing businesses. The table below shows average fees nationwide for various types of non-interest-bearing checking accounts.5

Table 2: Minimum Balances and Fees for Non-Interest-Bearing Checking Accounts
 
TYPE OF ACCOUNT
MINIMUM BALANCE TO OPEN
AVERAGE MINIMUM BALANCE
Average Monthly Fee
AVERAGE PER-CHECK FEE
 
 
Single-Balance, Single-Fee*
$159.21
$591.46
$7.35
$0
 
Fee-Only**
$78.41
$0
$5.27
$0.22
 
Free
$73.82
$0
$0
$0
*The monthly fee is not charged if accountholder maintains the minimum balance.
**The monthly fee is charged regardless of balance; per-check fees are not always charged.

Consumers should be aware that some states, including New York, require banks to provide low-cost checking accounts. Even so, consumers should verify whether monthly, per check, or other fees (e.g., out-of-network domestic or foreign ATM fees, overdraft fees, debit-card transaction fees, and transaction limit fees) are charged against these types of checking accounts.

Consumers may also wish to compare the costs of using a stored value card with those of using a check-cashing business or other alternative financial service provider. Fees at check-cashing businesses vary widely because they are determined at the state regulatory level. Fee limits in New York, New Jersey, and Connecticut, are among the lowest in the nation, ranging from 1.4% to 2.0% for most checks. As of 2003, eighteen states had no limits whatsoever.6 Check-cashing customers will also pay fees for bill payment services, money orders, and money transfer services.

Stored value cards may not offer all of the consumer protections that come with traditional checking accounts. Although a reloadable multipurpose card may provide a level of functionality equal to or better than a traditional checking account, not all cards offer the consumer protections enjoyed when holding a traditional checking account. Specifically, consumers should be aware that some cards do not currently provide federal deposit insurance to protect the cardholders’ funds in the event that the issuing bank fails.7 In addition, some cards do not provide protections under Regulation E which covers debit cards linked to traditional checking accounts. Regulation E has several requirements, the most important of which are provisions for fund replacement in the event of lost or stolen cards.8 Visa- or MasterCard-branded cards offer zero-liability policies, although consumers should be aware that these association and/or firm-specific policies are not the same as Regulation E protections.9

Regulatory changes and new product innovations may benefit consumers. On the regulatory side, it remains uncertain whether federal regulations that govern deposit accounts and debit cards will be expanded to apply to stored value cards. Several regulators, however, are presently looking into the issue. For example, the Federal Deposit Insurance Corporation (FDIC) is currently evaluating comments on whether stored value card funds should qualify as deposits that must be insured.10 The Federal Reserve Board is considering whether stored value payroll cards should be covered by Regulation E. The Office of the Comptroller of the Currency (OCC) issued an advisory letter in May 2004 offering guidance to national banks engaged in payroll card systems regarding appropriate disclosures, error resolution procedures, liability limits for unauthorized use, and other issues.11 States, too, may initiate consumer protection requirements for stored value cards, such as caps on certain kinds of fees.

Industry innovations may also benefit consumers’ interests in asset-building and credit-building functionality.2 Some card providers have begun to look at ways to add interest-bearing accounts to card products. Others are testing ways to report cardholder transaction activity to credit bureaus. The Office of Regional and Community Affairs of the Federal Reserve Bank of New York and the Center for Financial Services Innovation at Shorebank Advisory Services are working together to examine industry trends and innovations in these areas.

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1See Ted Dargan, “A Stored Value Update” and Karen Larsen, “Closed Systems: Strategies for Capitalizing on Gift/Convenience/Loyalty Cards”, Stored Value: Challenging the Credit Card Paradigm, Conference Proceedings, Pelorus Group, March 2004.
2These card features and others are described in greater detail in “Stored Value Cards: A Scan of Current Trends and Future Opportunities”, Katy Jacob, Center for Financial Services Innovation, 2004 (http://www.cfsinnovation.com/managed_documents/storedvaluecard_report.pdf).
3Fee ranges are taken from “Stored Value Cards: A Scan of Current Trends and Future Opportunities”, Katy Jacob, Center for Financial Services Innovation, 2004.
4Pin-based transactions tend to have higher fees than signature-based transactions.
5Board of Governors of the Federal Reserve System, “Annual Report to the Congress on Retail Fees and Services of Depository Institutions”, June 2003.
6 Financial Service Centers of America, “Check Casher Fee Schedule: Regulated States”, 2003. See http://www.fisca.org/FeeSchedulenew.pdf
7For more information on FDIC coverage, see http://www.fdic.gov/regulations/laws/rules/1000-100.html
8For more information on Regulation E requirements, see http://www.fdic.gov/regulations/laws/rules/6500-3100.html
9For more information on Visa and MasterCard zero-liability policies, see http://www.usa.visa.com/personal/secure_with_visa/zero_liability.html?it=il_/personal/secure_with_visa/index.html and http://www.mastercard.com/general/zero_liability.html
10See http://www.fdic.gov/news/news/financial/2004/fil4404a.html; comments were due July 15, 2004.
11See http://www.occ.treas.gov/ftp/advisory/2004-6.doc
12These innovations are described in greater detail in “Stored Value Cards: A Scan of Current Trends and Future Opportunities”, Katy Jacob, Center for Financial Services Innovation, 2004.

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