Prepaid cards are a nasty con. Consumers are disgruntled, confused and poorer because of them. If you dispute this summation, you’re either financially naïve or in on the take – either as a dirty payday lender or a profit-pocketing bank.
So say many of the top 10 headlines on a Google search of the term, including articles from the Globe and Mail, National Post and Canadian Living. Frustrated consumers have made enough noise that, in October 2012, the Federal Department of Finance suggested tighter regulations might be in order. Previously, the prepaid card market was only loosely monitored, with issuers basically charging whatever they could get away with. Still, some credit unions believe there may be higher ground in this mud-slung market.
There’s certainly good incentive to look. Prepaid credit cards are one of the fastest growing payment methods in Canada, increasing by 130 per cent between 2008 and 2011. That growth still only amounts to a two per cent share of total payment volume, but with debit payments rising only 17 per cent and cheques declining by 14 in the same period. And big opportunity is forecast for the future: a MasterCard-sponsored study predicted the Canadian prepaid market would grow from $2 billion to $19 billion by 2017.
While credit unions are largely absent from this market, nearly all major Canadian banks offer several versions of an “open-loop” prepaid card. Open-loop cards are offered by well-known credit card brands, such as Visa and MasterCard and are generally accepted in all the same places as regular credit cards. “Closed-loop” refers to cards only accepted at the issuing store – a Best Buy or Amazon gift card, for example.
In and out of the loop
Closed-loop prepaid gift cards are best known. These are purchased anonymously (name and credit information not required) at grocery stores, post offices and drugstores. They are often given to grandkids, newlyweds and employees, allowing the recipients to purchase whatever they like at the issuing store.
By contrast, buyers of open-loop prepaid cards typically provide more personal information in exchange for features similar to a regular credit card or chequing account. For example, these cards often permit balance inquiries and allow for ATM withdrawals and direct deposits from third parties.
Sounds pretty benign. Even practical. Not so fast, cautions Dave Schurman, COO of FirstOntario Credit Union (88,000 members, $2 billion assets under management). “If these things were a good deal, there wouldn’t be so many complaints,” he says. “As a member-owned financial institution, we wouldn’t offer anything that would be a ripoff to our members.”
Mmm, yes. There’s that don’t-rip-off members mandate to consider. “If you don’t read the fine print, it’s very easy to get fooled,” cautions Schurman, who regularly appears on Finance Fridays, a news segment on CHCH television in Hamilton, Ontario. “When choosing a prepaid gift card for a child or grandchild, people say, ‘Oh, I’ll get them a $100 card.’ In a lot of cases, it costs $110 to buy a $100 card and with [monthly] fees the kid only gets $80, so they’re paying $110 for $80.”
Fees, fees and more fees
In fact, all open-loop prepaid cards charge an activation (i.e. purchase) fee. Nonreloadable cards typically cost between $2 and $8; re-loadable versions are usually more expensive – from $7 up to $40. Many cards also charge for monthly maintenance, transactions, ATM withdrawals, loading and balance inquiries, as well as monthly dormancy fees for periods of inactivity. A $50 prepaid gift card, for example, might cost $5 in-store for activation and $5 each month that it goes unused. At the end of three months, the recipient has only $30 available to spend, without having made a single purchase.
Also frustrating are expiration fees, when the entire remaining balance is eaten by one last “fee” after the prepaid card expires. Often terms are detailed only inside the packaging, warns Schurman, so consumers or recipients are not aware the balance is rapidly dwindling until the card is unexpectedly declined.
Reloadable Visa or MasterCard prepaids often have even higher fees. “Money Mart has one called Titanium,” says Schurman. “Twenty dollars to activate, $7.50 monthly maintenance, $2.50 to reload and 50 cents per transaction.”
“A prepaid gift card might be the only route in some situations for those unqualified for credit”
—Mo Ladak, VP Payment Solutions and Member Services Centre, Vancity
In Schurman’s view, people buying high- fee reloadable prepaids like these are often financially impaired by bad credit or bad luck. “Customers are going there because they feel they don’t have any other options and they’re being ripped off.”
In contrast, a credit union’s mandate is to bring forward new products for the good of its members. “One thing that will be different before FirstOntario, and hopefully any credit union, would offer cards like this,” says Schurman, “is that we ensure [they’re] good value for members and we’re well promoting benefits and any costs associated.”
Using the power for good
Despite downsides, Vancouver-based money coach Sheila Walkington recommends prepaid Visa- or MasterCard-branded cards for some clients – typically for people with good incomes but “poor cash flow management skills.”
Instead of using debit cards, she suggests the client load $200 on a prepaid card for dining out each month. “Some people need a set maximum,” says Walkington. “If you have money in your bank account, it’s easy to go over. I’d rather my clients spent $3 to activate the card than go over by $50.”
She also sees value in the prepaid closed- loop gift cards, particularly for adult children attending university. “If it’s a special [gift] card just to be used for books, then it’s not as tempting as money in their bank account accessed with their debit card.” As well, she notes that open-loop cards are replaceable, while lost cash is not. “I’d rather bite the bullet and pay the fee than have [my child] overspend on my credit card or lose the cash.”
The branded prepaid edge
Vancouver City Savings Credit Union (497,000 members, 17 billion in assets under administration) is possibly the only Canadian credit union to currently offer a prepaid option. A prepaid gift card might be the last resort in some situations for those unqualified for credit, says Mo Ladak, Vice- President, Payment Solutions and Member Services Centre at Vancity. “For example, you can’t buy food on a plane without a [credit card or a credit-card branded prepaid]. A few months ago, I was travelling with some youth who had extra luggage to check in. They had to pay extra money, but couldn’t do it without a credit card.” Fortunately, an airport kiosk sold prepaid Visas. Problem solved.
Vancity also offers its members a reloadable option, but the majority of sales are to non-members outside the Lower Mainland, through its subsidiary Citizens Bank of Canada. These buyers typically don’t have access to regular services at financial institutions and use the card as an alternative to a chequing account.
Prepaid cards, like other types of cards, lend themselves well to corporate branding
Paycheques or social assistance funds can be direct deposited onto the card each month, so those in remote areas can avoid time-consuming trips to a bank or inflated fees for cashing cheques at “fringe financial institutions,” explains Ladak. In keeping with the credit union community mandate, Vancity donates five per cent of profits on prepaid and other products to its Enviro Fund.
Recently, Central 1 Credit Union hosted a series of focus groups with member credit unions to determine if the system was interested in offering prepaid cards. Straight off, participants reported a definite demand for prepaid products. When credit unions couldn’t cough up the goods, members bought from other vendors, often Big Bank competitors. This gap in service was highlighting an apparent weakness in the system’s all-round service offering, said participants. As well, sending one’s members off the premises for a product increases the risk of competitor poaching.
Second, if a prepaid card product were brought to market, focus-group attendees didn’t want monthly fees attached. This would avoid much of the negative press arising from cards already on the market. Members would almost certainly choose a product from their own branch, over a Big-Bank or generic-branded product with higher and more complicated fees. As well, they wanted to maintain autonomy over the activation cost, says Vishal Raniga, Product Manager, Foreign Exchange at Central 1 Credit Union. “Some might be in a more competitive market than others and others are able to charge more.”
Credit unions also wanted the ability to market the product under their own brand. Prepaid cards, like other types of cards, lend themselves well to corporate branding. Not only is it relatively inexpensive, cards get flashed in front of potential new members all the time.
Pilot in the works
After taking feedback into account, Central 1 proposed two types of prepaid cards: a non-reloadable gift card and a U.S.-dollar reloadable travel card. Participants were particularly interested the U.S. dollar card – a first for FIs in Canada. While other prepaid cards can be used in the U.S., the Central 1-led card initiative will be denominated in the greenback. This distinction means that members will not pay the additional foreign currency exchange fee for each U.S. dollar transaction. Many credit union members are not aware they are paying this fee when they use their typical Canadian credit cards in the U.S. Since fees are typically 2.5 per cent per transaction total, it amounts to a hefty and sizable sucker punch on a $5,000 holiday.
A pilot, scheduled for the first half of this year, casts First West Credit Union (161,000 members, $6 billion in assets under administration) in the starring role. Members of this Langley, B.C.-based credit union are wont to regularly motor south for a day of bargain hunting, says Ashok Gupta, Assistant Vice-President, Marketing at First West.
“The key reason we decided to go with [the pilot] is the U.S.-denominated card. That was a gap in our portfolio and a gap in a lot of FI’s portfolios. Canadians do a lot of cross-border shopping, especially [those] based in British Columbia in the Lower Mainland and Okanagan with the border accessible by road.”
A U.S.-denominated prepaid has another advantage over regular debit and credit cards in that the foreign exchange rate is locked to the time of loading. It does not fluctuate day by day. This allows members to purchase cards for future trips when the rate is favourable. The U.S.-denominated prepaid card is intended to replace traveller’s cheques, which will likely soon be obsolete. “Our credit unions have told us that [traveller’s cheques] are hardly being sold because merchants are not accepting them,” says Raniga.
A ‘reasonable replacement’
Gupta agrees: “I see it as a reasonable replacement. It’s safe, used just like a regular credit card, without having to pay foreign exchange fees that you would have to pay with every transaction. You can load as much as you want when the rate is good for you.”
Travelling on new terrain
The regulations as they were proposed in 2012 would do away with expiring funds, and disallow dormancy and monthly maintenance fees either completely or for an initial period of six months to a year. The exact form they will take and the date they come into force is still unknown, says David Barnaby, spokesman for the Federal Department of Finance.
A reloadable U.S.-dollar travel card will not so much alter the current prepaid landscape as drive out onto new terrain. Credit unions that emphasize attributes such as agility and being early adopters of technology will likely want to give the new travel prepaid a shot. Those more interested in covering all basics in their product offering may be more inclined to push the gift card. (Perhaps even taking a cue from First West’s successful Referral Perks program, rewarding referring and new members with $50 gift cards.) Neither option need drag credit unions down into the sludge of unfair fees and sneaky terms that have characterized this market in past.