In a statement, Tescher made the case for general purpose reloadable (GPR) cards as a necessity for the most "financially vulnerable" consumers who cannot afford basic banking services. She characterized that growing segment of underbanked consumers as individuals facing home foreclosure, unemployment and high levels of debt due to the country's financial turmoil.
Tescher recognized that some prepaid products are "poorly structured, outrageously priced and a bad deal for consumers," but that the majority of products are accessible, simple and convenient. To ensure the industry lives up to its promise, Tescher recommends consumer protections be implemented, including Federal Deposit Insurance Corp. pass-through insurance, Regulation E requirements and standardized fee disclosures.
As contained in the Credit Card Accountability, Responsibility and Disclosure Act of 2009, Reg E mandates fee disclosure requirements.
Henry took a different tack in his testimony. He characterized banks as having abandoned the underbanked. He cited FDIC research that revealed 73 percent of banks realize underbanked consumers represent a sizable portion of their markets, but that only 17 percent of banks have made outreach to the underbanked a priority.
Not so at NetSpend, where word of mouth has driven the popularity of its GPR card products, Henry said. Contrary to the notion that the industry is an unregulated "Wild West," NetSpend for one is "highly regulated" at the federal and state levels, he added. In fact, Henry is convinced GPR card providers serving the underbanked adhere to a "higher standard … with an ethos of service to hardworking people often struggling to make ends meet."
In the question and answer session that followed the statements, Tescher was pressed on the role of the Durbin Amendment to the Dodd-Frank Wall Street and Consumer Protection Act of 2010 in swelling the ranks of GPR card users. Tescher responded that one reason more people have turned to prepaid is because banks eliminated free checking accounts to shore up shortfalls from decreased debit card interchange revenue related to Durbin.
"You're seeing banks start to re-price and restructure their accounts in a way that, frankly, just won't be of enough value," she said. "I don't think a lot of banks are effectively kicking consumers out. I think consumers are voting with their feet."
Henry pointed out that other forces are in play that benefit prepaid, such as the limitations of the banking system's physical infrastructure. "The most efficient banks in this country can serve maybe 5,000 customers per retail branch," he said. "And those banks need $20-to-$30 million in deposits per branch.
"Netspend has 2 million customers, which means we would need 400 branches to serve 2 million customers. But with an average daily balance of around $80, our static deposits might be enough to support four or five branches. So the basic business model of traditional retail banking – and it's not to be a criticism of the banks – it will just never, ever be able to serve this load of modern consumers."
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