After extensive research, Bank of America (NYSE:BAC) is beginning to roll out its new SafeBalance checking account, which is aimed at those consumers who carry low balances, don't need paper checks, and don't want to worry about overdrafting.
This account is the first product of its kind offered by one of the big banks, and offers the target customers certain features that have been unavailable, until now. This could help B of A capture some of the nearly half-trillion dollar prepaid debit card market, which could produce big-time profits for the company and its investors.
The new "SafeBalance" account
As my fellow contributor Jessica Alling reported, B of A's new account is targeting those customers that carry low balances and are prone to overdrafting. For a fee of $4.95 per month, the bank guarantees that a customer's account will never overdraft. Instead, if there isn't enough money in the account to cover an attempted charge, it will simply reject the purchase. This fee will seem small to those Americans who overdraft regularly, as Bank of America charges $35 for each offense.
Why it matters to investors
This is important to B of A investors because it is the first account of its kind to be offered by a major bank. A recent Time magazine article suggested that the structure of the account is very similar to some of the prepaid debit card products currently offered by companies like American Express. This got me thinking: just how big is the prepaid market and how much of it could Bank of America potentially capture?
The prepaid debit card market
According to one recent study, there is currently around $450 billion in annual global prepaid card volume. This is expected to grow at an annual rate of 22% between now and 2017, resulting in a $822 billion market.
According to the FDIC, more than 20% of U.S. households are "underbanked", meaning that they don't rely on traditional savings or checking accounts and deal mostly with cash (or cash equivalents). Companies began to take advantage of this several years ago by introducing prepaid debit cards, and customers jumped on the idea. Prepaid cards are safer to carry around than cash, and some purchases require a debit or credit card.
Why Bank of America has an advantage here
Until recent years, prepaid cards were known for their high fees and poor consumer protections. Since then, fees have come down drastically, mainly due to increased competition. Most prepaid issuers offer some consumer protections, but since SafeBalance is technically a checking account, these are automatically included.
Additionally, the debit cards linked to the SafeBalance account are usable at B of A's extensive network of ATMs, whereas many prepaid cards are either not usable at any ATM or have fees associated with withdrawing cash.
There are other advantages for consumers here as well. For example, if you want to rent a car, the rental companies typically require a major credit card or a debit card linked to a checking account. For instance, Visa's prepaid card FAQ site says "You may use your card for final payment of a rental car bill, but a credit card may be necessary to reserve a rental car."
In other words, the SafeBalance account offers customers the benefits of a major checking account and debit card without some of the major drawbacks such as overdraft fees or minimum balance requirements, which are sure to appeal to some of the 20% that don't currently have bank accounts.
Tons of potential
Just how many people will take advantage of the SafeBalance account remains to be seen, but it would be appealing to me if I was worried about overdrafting regularly. As I mentioned earlier, the prepaid card market is approaching half a trillion dollars annually and is growing rapidly, so even if Bank of America can capture a small amount of this, it could make a big difference to its bottom line.
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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.