Paper or Plastic?

Reloadable prepaid cards are the bank accounts of the future for a growing segment of American consumers. According to Wal-Mart Stores, an estimated 73 million people, roughly 40 million households and 25% of the U.S. population, fall into either an unbanked or underbanked category. Retailers have begun to realize the benefits of selling general-spend reloadable cards as well as replacing paper checks with reloadable payroll cards.

Unbanked consumers, who typically have lower-than-average earnings, face a number of fees when they convert paychecks to cash and cash to payments.

Like many retail executives who work 50- to 60-hour weeks, lower-level associates also put in long hours. However, unlike an executive with a six-figure annual income, an unbanked consumer’s compensation is miniscule.

Consider a typical scenario: An unbanked employee at one of your stores works 35 hours a week for $9.00 an hour. To supplement that income, she spends 20 hours a week stocking shelves for another retailer at $8.00 an hour.

At the end of her 55-hour work week, she has two checks totaling $475, for which she pays an average of $6.00 each to have the checks cashed. Additional fees are tacked onto each of the payments she makes to cover living expenses such as rent and utilities—further diminishing what remains for necessities such as food, clothing or medicine.

Reloadable prepaid cards provide a payment system to ease some of that pain—at least theoretically.

Unseating the low-price leader: Wal-Mart recognized the plight of the unbanked consumer and opened its first MoneyCenter in 2004, providing a range of financial services including payroll-check cashing, money orders, money transfers and bill payments. By the end of 2008, Wal-Mart expects to have 1,000 MoneyCenters.

Because millions of consumers have no place to deposit checks, check-cashing services have become lucrative profit centers for a number of retailers. The typical industry charge for cashing a payroll check is $6.00; Wal-Mart charges $3.00.

However, the low-price leader has been beaten when it comes to providing reloadable prepaid cards, which have gained increasing popularity as a preferred vehicle for the unbanked and underbanked consumer to manage personal finances with a payment card that is accepted almost as ubiquitously as a credit or debit card.

Tampa, Fla.-based nFinanSe has set new standards for fairly priced reloadable prepaid cards. The industry standard for purchasing a reloadable card is $9.95. Wal-Mart beat that price with an $8.94 reloadable card. But nFinanSe topped them all with a low price of $5.95 per card, and sweetened the deal with administrative fees significantly below other providers. For instance, nFinanSe countered average monthly fees of $4.95 with a $2.95 monthly charge, and also kept its reload fees and ATM-withdrawal charges well-below the going prices. (See chart.)

“The No. 1 complaint from consumers using reloadable cards was that they didn’t know the balance on their card, and when they called the provider to check the balance they were charged a customer-service fee,” explained Jerry Welch, CEO of nFinanSe. “With our service, cardholders receive text messages with a transactions summary and account balance whenever the card is used. We don’t charge for this service or for customer service over the phone.”

Other providers charge incremental service fees. For instance, NetSpend’s reloadable AllAccessVisa cards charge fees for both automated and live phone service. However, none of the providers Chain Store Age researched charge for online balance checks or for direct deposits to reloadable card accounts.

Tom Crowder, general manager of prepaid cards for Discover Network, noted that with reloadable payroll cards any transaction fees or monthly fees would typically be absorbed by someone else in the finance chain, not the employee.

“Reloadable payroll cards have cost-savings for both the employee and the employer,” Crowder continued. “Depending on the frequency of pay periods, an employer can save $75 to $150 per employee by converting from checks to prepaid cards. In addition to economic savings, employees can use prepaid cards to create a personal financial history, make payments and get cash from ATMs or cash back at retail purchases.”