Mercator Blog

Is Chase the Canary in the Prepaid Coal Mine?
Date: January 14, 2014
Research Team
J.P. Morgan Chase & Co. plans to end its business in the payroll and government tax and benefits prepaid segments. Reuters reported that company plans to sell or wind down its payroll and government benefits programs but retain its Chase Liquid prepaid cards.

Chase plans to leave the payroll and government segments because of “a headache of risks in operations and regulations,” according to an unnamed source in the Reuters article.

The move follows the bank’s exit from the open-loop gift card segment. In spring 2013, Chase stopped selling its Visa gift cards through its branches. By September, it had ended all open-loop gift card sales. The company said at the time that is decided to get out of the gift card business in order to focus on other business lines that had better growth potential.

The question is whether this will be an example of one large bank making strategic decisions based on its own business or whether Chase will lead the trend of large banks abandoning certain segments because the regulatory and business environment have become too uncertain to ensure the sustainability of the business.

While the Federal Reserve Board did not mandate interchange reduction or caps on prepaid programs identified as exempt, the networks in the process of creating new interchange tables added fee restrictions and caps on both exempt and nonexempt programs. Payroll programs fall under different laws in every state and come under scrutiny in the wake of lawsuit by a McDonald’s worker in Pennsylvania. (Chase was not a party to the suit.) The competition for government programs has been fierce and the demands made by government agencies have been severe in regards to costs and fees that can be charged.

It may be that these and other factors will lead all banks to reconsider their prepaid strategies and decide to abandon certain segments, or leave the business altogether. For a longer discussion of these issues, please see the Mercator Advisory Group Viewpoint: Is Chase a Canary in the Prepaid Coal Mine?