How long will the prepaid card party last?October 10, 2012: 11:24 AM ET
Wal-Mart and many big banks are turning to prepaid cards as a response to Dodd-Frank, but beware: Regulators love to end a good banking party.
FORTUNE – In a post Dodd-Frank world, banks are scurrying for profits in a largely unregulated area of banking: pre-paid debit cards. But just as the newfound party gets started, it could just as quickly come to an end.
On Monday, Wal-Mart Stores (WMT) and American Express (AXP) unveiled Bluebird – a prepaid card that works much like a debit card. Though it's not tied to a typical, regulated bank account, cardholders can use many of the same features as traditional bank account holders, from withdrawing cash from ATMs to making deposits via their smartphone. However, they won't have to keep a minimum balance or pay any monthly or annual fees, which is a draw for people who use few, if any, bank services (a market worth an estimated $45 billion). Also, the companies say, there will be no overdraft fees.
Wal-Mart's move is to be expected. The Bentonville, AK-based chain has held its position as America's neighborhood retailer and grocery store. With mixed successes, though, it has tried in recent years to emerge as America's neighborhood bank: Wal-Mart has financial services locations, called MoneyCenters, in more than 1,000 stores that offer electronic bill paying, check cashing and tax-preparation services. In recent years, the chain has tried to get a consumer-banking license, but the financial services industry has bitterly (and successfully) fought such efforts.
While Wal-Mart's big dreams in banking are far from realized, the chain has nonetheless followed what other banks have done by making prepaid-debit cards a bigger part of business.
In March, Wells Fargo (WFC) introduced a reloadable prepaid card. JPMorgan (JPM) followed with a card branded, "Liquid," which for $4.95 a month allows cardholders to withdraw and deposit as they please. Wal-Mart certainly adds to the competition, with Bluebird, which will be available to customers next week. Of course, this isn't Wal-Mart's first prepaid card. The chain offers MoneyCard, which is available for $3 to buy, $3 a month and $3 to reload. Bluebird will cost $2 per out-of-network ATM withdraw and $2 per withdraw without direct deposit.
Indeed, there's a business case for going into the prepaid business. It scoops up all those consumers tired of high banking fees. It also responds to the growing number of budget-conscious spenders who might rather deposit a few bucks in their prepaid card each week and save the rest of it.
More broadly, though, prepaid cards give banks a way around rules tied to a narrow provision of the Dodd-Frank financial reform law, called the Durbin Amendment, which restricts how much banks that issue debit cards can charge merchants. Prepaid cards are an exception, so banks can still charge merchants high fees whenever a consumer swipes a prepaid card.
But as Wal-Mart and others flock to get a slice of the market for prepaid cards, it can easily come to an end. The nation's consumer financial watchdog, the Consumer Financial Protection Bureau, is considering restrictions on prepaid cards typically marketed to lower-income consumers. The agency is reportedly worried about high fees and inadequate disclosures over exactly how much these products cost customers.
And as Wal-Mart deepens its footing in financial services, it's hard not to wonder if the chain is legally operating as a bank, or if it's actually a full-fledged bank. These are questions posed by bank analyst Dick Bove of Rochdale Securities in a research note released Monday:
"Wal-Mart will be collecting deposits through direct deposit accounts. It receives fees as a consequence of its lending activities through its credit cards. Plus, it hedges its business operations in the financial markets. I can find virtually no information about any of these activities in the company's Annual Report and 10K. However, companies engaged in collecting deposits and lending money are by definition banks. Banks are not allowed to be involved in banking and commercial activities. It appears that Wal-Mart is involved in both."
Bove may or may not be totally off. Wal-Mart did not respond to a request for comment.
The larger point is that the business of prepaid cards is so unregulated that many are trying to get in on it – banks and non-banks, alike.