The Prepaid Press
For last month’s 2010 Predictions, we talked to dozens of industry leaders and experts to get their perspective on what to expect in 2010. One of the predictions about prepaid debit cards was so intriguing we decided to talk to the prognosticator himself, Alan Mattei of the Novantas consultancy. He speculated on the impact of recent credit card legislation on the sale of prepaid debit cards. Specifically, he sees a significant opportunity, if prepaid card providers act quickly.
GR: I was intrigued with a prediction you made regarding the impact of changing bank regulations on prepaid debit cards. What are these regulations that are going to have this impact?
AM: Well, the first and perhaps the most significant are the regulations that have come into place that we refer to as UDAP, Unfair and Deceptive Acts or Practices, which is around the credit card industry, and the limitations that have been put on the card company.
GR: What is the impact?
AM: Basically, the impact that those regulations are having on the credit card companies is that they have taken away some of the practices that have been, in the past, very profitable for the banks. As an example, they were free to reprice [customers] at any time and now there’s a limitation that in the first six months of the relationship, they can’t reprice.
So you would come in at what would appear to be a low teaser rate and you would keep your zero percent for X months, but the go-to rate may have looked attractive at 11.9 or something. Then you find yourself, a month or two into the relationship, with a repricing up to 18.9. Basically, as they gathered more data about you, they made a reassessment on your risk and they were free to adjust for that risk.
GR: And, before this new legislation, banks could do this repricing at will?
AM: Before, I could spread these great offers around, knowing that, yes, some were high-risk and some were low-risk, but for the high-risk ones, I’ve already got a fairly significant interest rate on those accounts and they have balances, so I’m going to earn back the interest money off of those folks and that will help subsidize the other ones that don’t earn as much or the ones that go back. So that was a good game plan.
GR: So they start turning down the number of people they offer credit cards to as a result, and that’s what opens up this opportunity for these prepaid debit cards, right?
AM: In the end, they’re going to have to tighten all these things down and raise rates. They’re going to have to reduce their tolerance for risk, which means they’re going to have to narrow the population that they’re going to accept, and they’re going to lower the credit limits on people if they feel that there’s any kind of risk at all.
GR: All of this because of the new legislation?
AM: Because of this legislation, if I can’t turn up your rates, because I find out that you’re riskier than I thought, one of the ways to mitigate that is to just not give you as much credit. All of this is going to have the effect of tightening down the amount of credit card loans, if you will, that are going out to people. And those loans that are going out are going to be at higher rates. So it would seem to me that consumers are going to start looking towards debit cards, saying,