Insurance company MetLife started to run a commercial last year featuring the Peanuts characters who say that life insurance ought to cost 5 cents as opposed to the $16 premium that MetLife offers. When Charlie Brown, Lucy, and Snoopy persist in their 5 cent pricing stance, an exasperated employee finally says “Everything can’t be 5 cents.”
See the commercial here: https://www.youtube.com/watch?v=sTDUB69_pR8
When it comes to prepaid cards, providers are often in the same position as the beleaguered MetLife employee. Consumer advocates and customers often think that even five cents is too much and that everything should be free. Pricing in the financial services market was distorted first by free checking, and then American Express further distorted prepaid pricing with the launch of its Bluebird and Serve products. Now, people point to those cards and ask why everything can’t be priced at Bluebird levels.
The problem is that free checking and the American Express products have other sources of revenue to support them that are not available to most prepaid program managers.
In the case of free checking, banks were able to provide that service because they made money on lending out deposits, collecting debit interchange, and charging overdraft fees. With the reduction in revenue from the second two sources, the availability of free checking has gone down as banks add more conditions to qualify.
In the case of American Express, the Bluebird and Serve cards are supported by the American Express’s credit business, are exempt from interchange restrictions, and may not be required to turn a profit. For American Express, prepaid cards serve the strategic purposes of developing brand awareness among new customer segments, prescreening potential customers for credit cards, and tapping into consumer desire to use debit cards as a primary spend card. American Express has no debit card of its own, but by linking Bluebird cards to customers’ checking accounts, it can offer a debit alternative.
The rest of the industry is forced to continually justify itself in the face of these distortions. The reality is prepaid cards exist as a fee-for-service business. Perhaps if they could operate as nonprofits and their employees could work as volunteers, then they might be sustained on interchange from transactions alone, but providing the cards and the services that go with them costs money. Developing new services and adding functions such as mobile apps requires that the providers make money beyond simply covering today’s expenses.