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Ever since the mortgage meltdown and the financial crisis that followed, big banks have been on the hot seat. Although you can't be surprised that banks are doing everything they can to maintain their profitability, some of the financial products that they're pinning their future hopes on are things that you'll never need or want.
Collateral card damage
Credit card reform has put a major dent in the bottom lines of some of the biggest card-issuing banks. Bank of America (NYSE: BAC ) warned investors earlier this year that the deadly combination of credit card reform, debit card law changes, and other limitations on service fees and miscellaneous charges would cost it billions annually. One survey indicates that just from debit fee changes alone, banks could lose $9 billion of the $22.8 billion they collect in annual interchange fees.
In response, banks are taking a hard look at new ways to raise revenue. At least in their eyes, one of the more promising alternatives comes from prepaid debit cards.
How prepaid cards work
As an alternative to cash, prepaid cards are extremely simple from the customer's perspective. You can buy a prepaid card with nearly any amount loaded on it, and can generally reload it with more money if you want. When you want to buy something, the prepaid card generally acts just like a debit card would.
The rub, though, is that prepaid cards generate fees on both ends. The transactions are identical to debit card transactions from the merchant's perspective, in that Visa (NYSE: V ) and MasterCard (NYSE: MA ) charge similar interchange fees that they would when a merchant's customers use a traditional debit card. In fact, because prepaid cards are exempt from proposed regulation of debit cards, it's entirely possible that interchange fees could remain high even after similar fees on debit cards fall.
In addition, many cards charge customers fees for their cards. Sometimes, those fees get ridiculous. The much-maligned Kardashian Kard died a quick death, as pundits and parents alike rebelled against the card's $99.95 annual fee. But other companies, including Green Dot (NYSE: GDOT ) and NetSpend Holdings, charge substantial fees for similar cards, and in some cases the costs are even higher.
Gimme some money
It's the prospect of that fee income that's attracting attention from bigger institutions. According to The Wall Street Journal, US Bancorp (NYSE: USB ) , Wells Fargo (NYSE: WFC ) , and B of A are all looking at prepaid cards to supplement fee income. Capital One (NYSE: COF ) already has a prepaid card offering, with a monthly fee of $4.95 for those who don't add at least $500 to their cards each month.
But what banks don't seem to realize is something that's obvious to anyone who thinks like a customer: There's absolutely no need for these prepaid cards. Walk into a bank branch and open up a checking or savings account, and you'll almost certainly be eligible to get a debit card absolutely free. In fact, your bank will encourage you to use it as much as possible, since each purchase you make on it gives them a bit of fee income. Some banks even offer higher interest rates for customers who use their cards a certain number of times each month.
If banks really want to make this work, they'll have to stop offering services they've provided for decades. And they can expect customer backlash to more than offset any profits from customers who grin and bear the changes.
Don't do it
For extremely limited purposes, such as educating a teenager on how credit and debit cards work or giving a gift in lieu of cash, prepaid cards aren't completely useless. But those who think that it will become the next generation of the debit card are deceiving themselves. They may stick around longer than the Kardashian Kard, but prepaid cards aren't going to make waves in the financial industry anytime soon -- no matter how much banks might want them to.