A few weeks ago, I wrote about how prepaid cards are proliferating, that American Express and Walmart had come out with a no-fee card called Bluebird, and not everything is as it seems.
You all chimed in with lots of great comments, including some that questioned what I really had against prepaid cards, especially if they are "no-fee" cards and serve those with less-than-average wherewithal (wherever that descending measure is these days) who rely on them for everything from consumer transactions to bill paying and ATM access.
First of all, let me say that I think prepaid cards are good. They're not great, but I hope they get there.
But I want to talk about what's not great, and how to make prepaid cards better.
I told you about the interchange fees that are charged to merchants and how those end up being passed along to consumers. Maybe that's not such a big deal if we can quantify their additional cost on a per-item basis. All I'll say about that is, it adds up.
My problem with prepaid cards is what we can't see about them.
What's going on behind the scenes? Do they offer adequate protection to their users? Is the proliferation of them going to present some systemic risk? How should they be regulated?
Regulation? I know what some of you are thinking. We have too many regulations as it is, and the regulators are all asleep at the wheel anyway, so regulation is the problem not the answer.
I agree with you, but not exactly. You'll see what I mean.
More Protection for Prepaid Cards
For me, the bottom-line with prepaid cards is that the folks that use them need protection.
That's because the people using prepaid cards are an increasing lot of less than flush folks who don't have an adequate voice in their own affairs when it comes to their financial transactions.
The Federal Reserve recently came out with some interesting data and I owe American Banker (a great publication, by the way) for bringing it to light in a recent article.
A Fed survey showed that there are some 17 million "unbanked" adults in the U.S., up from 14 million in 2009. About 10% of adults use prepaid cards, about the same as in 2009.
But usage of prepaid cards by those unbanked adults increased from 12% to 18%. And perhaps more telling (of a few unfortunate themes) is that of those people who dropped out of the traditional "previously banked" category, use of prepaid cards rose from 19% of them to 27%.
Meantime, prepaid card usage declined among the "fully banked" from 8.1% to 7.3%.
I'm not going to jump to random conclusions about how some of this is proof that the rich are getting richer and the middle class is getting poorer. Of course not. I'm not the kind of guy to say I told you so, but if I was, I'd sure be saying it now.
My point is the increasing category of prepaid card users needs more protection.
People who buy prepaid cards don't get any interest on what are essentially "deposits." Don't bother with the fact that interest is non-existent now; that will change eventually. Their money isn't protected by the FDIC unless it's a bank-issued card, and even then, there are ways that banks can issue cards outside of those protections.
Meantime, the "sponsors" of these cards are collecting your money and banking it in FDIC-insured banks before you spend it. Or maybe they're investing it to make an interest rate spread somewhere, or speculating with it to make huge profits for themselves. There's nothing stopping them, really.
That's my point. Prepaid cards are bank accounts, however you look at them. You know the old litmus test. If it walks like a duck; if it quacks like a duck; if it [rhymes with spits] like a duck… IT'S A DUCK.
Prepaid card users need prudent regulatory protections. We all need prepaid cards to be prudently regulated before they grow so big and implode somewhere that reverberates through the economy and we all say "Here we go again."
Regulating the JOBS Act
Next up, because it's about regulation, let me tell you about something that just happened that you may not know about.
Mary Shapiro is stepping down from the top post at the Securities and Exchange Commission. You knew that.
What you may not know is that some emails have surfaced (they didn't just surface, she was "outed") where she wrote internally that she didn't want to do away with a three-decades-old protection (parts of Rule 506) that has served investors and the public very well. The emails are controversial, not because she was looking out for the public's welfare (far be it from her to think about the public), but because she said she was concerned about her legacy.
Yes, Mary Shapiro wrote that she was concerned about her legacy if she was to allow old investor protections to be stampeded by pimping and pandering legislators who rammed through the JOBS Act back in April, and wanted her to roll over and let them steamroll her.
The powers that be wanted the SEC Chairwoman to not bother with putting out a controversial aspect of the JOBS Act for public comment, but to exercise her powers to just make it happen.
It sounds simple enough. The JOBS Act calls for the lifting of a prohibition (Rule 506) on "general solicitation," whereby folks could finally advertise that they were looking for money to start a new businesses, or advance an existing businesses, or just rip-off whoever would read their wild pitches and send them money.
Shapiro didn't send out the proposed changes to Rule 506 for public comment, which is almost always the norm. She sat on the rule changes, got a change of heart and put them out for comment this past summer. That infuriated a bunch of Republican lawmakers (and some Dems, too) because she didn't ramrod their legislative wishes down the public's throat.
For heaven's sake, the woman was only trying to do her job. Not that she's always on top of her portfolio all the time, she hasn't been. But, heck, that's a crazy job with pigs and panderers and bankers and legislators (same thing) all over the Commission to get their schemes approved, or for the SEC to turn their backs while they steal what they can from whomever they can tee-up.
But I digress.
The point is, changes to Rule 506 don't have to be delayed.
Like the kind of regulation that is needed for prepaid cards, it should be simple and in black and white.
The problem with regulations in America isn't that there are too many. It's that they are too wordy (for the purposes of allowing loopholes).
We need to revisit a lot of regulations. We need to cut them down to black and white rules that protect the public and punish those who do harm to us.
Is that so hard?
Break a law, go to jail. Break it twice, hang "em high.
Maybe there would be fewer banks and bankers. For sure, there would be fewer crooks in Congress.
A boy can dream, can't he?
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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