The NetSpend brand has long dominated the prepaid debit card sphere, from its signature NetSpend prepaid to affiliate-branded products like the BET Control card. Characterized by high fees, NetSpend cards courted the un- and under-banked with supplementary savings accounts, prescription discounts and the promise of financial security without overdraft fees or credit checks.
But a new guard is shaking up the market. Banks, retailers and others whose core business isn’t purely prepaid now issue lower-fee, no-overdraft checking alternatives that may lack the star power of, say, the Kardashian Kard, but are far cheaper than checking or traditional prepaid. Dominating the headlines are the Chase Liquid, launched earlier this year, and the Amex Bluebird, set to launch in early December. Their sparse, simple fee structures stand in stark contrast to the NetSpend cards’, but as NetSpend CEO Dan Henry told The American Banker, he isn’t threatened:
My first reaction is: Fantastic. They are going to start spending tens of millions a day educating everyone in America about a prepaid card.
Is Henry’s complacency justified? Will the old guard’s message still be heard in the whirlwind of new marketing?
The NetSpend value proposition: It’s cheaper than checking
The pitch for NetSpend – indeed, for prepaid – is that the cards offer control over spending, without the possibility of debt or overdraft, at a lower cost than checking accounts. But the key is that NetSpend compares itself to checking accounts; the Liquid and BlueBird compare themselves to NetSpend.
In a recent call with investors, Henry emphasized that a) prepaid cards are more affordable than checking or cash and b) his cards are competitively priced.
Henry: The Control card with BET [is] right in the sweet spot of where the pricing is for monthly cards in the market today…If you look at our Premier card, if you are on direct deposit that product is only $5 a month.
Gresham: Obviously as those price points are much lower than what this consumer can get at a traditional financial institution and perhaps a third of what the cash economy costs.
Henry: “It is our hope that the consumer advocates will read [this transcript] and take note of what we just discussed.”
-NetSpend 4Q2011 earnings call, February 2012 (emphasis mine)
But this affordability discussion ignores an important point: NetSpend customers paid far more than $5 for their cards. During the quarter in question, NetSpend collected over $12.50 in fees from every customer per month. Note that this figure excludes ATM surcharges paid to owners (usually $2-3) and cash load fees paid to third-party retailers ($4.95 with the popular Green Dot MoneyPak). Just one ATM withdrawal and one cash load a month brings the average NetSpend cardholder’s cost to nearly $20 a month – well more than a big-bank checking account.
Henry argues that his product and brand are safe because they hit the “sweet spot” of comparable prepaid products. Not anymore.
Cheaper prepaids changing the discourse
Thus far, NetSpend has compared its product to checking accounts, with their maintenance and overdraft fees. Arguably, for serial overdrafters and low-balance customers, prepaid might be a cheaper option.
Henry believes that Chase and Amex’s advertisements will benefit the entire prepaid industry. But he assumes that they will adopt his marketing strategy of comparisons to checking accounts, when clearly, the new target is prepaid cards like his own. Amex, Chase and others are urging consumers to view prepaid from a cost perspective. In such a comparison, NetSpend cannot win.
If NetSpend cannot compete on cost…
Of course, the NetSpend marketing campaign doesn’t solely rely on a cost comparison. When questioned whether low-cost cards like Amex’s would reduce NetSpend’s market share, CEO Dan Henry countered that prepaid cardholders didn’t care about price. From the NetSpend’s 2Q2011 earnings call:
Analyst: There are some offerings in the market…who are offering products that are more or less free. And if you look at the fees that NetSpend charges — there’s no way to avoid them in certain cases. What we’re seeing today in terms of [NetSpend's favorable] revenue performance, is it really a reflection of the fact that your products are more expensive than the alternatives out there and consumers are having a hard time distinguishing or figuring out exactly what the value proposition is?
Henry: I spend a lot of time talking to many of my colleagues in the industry, either be it in the prepaid industry or just in dealings with these low to moderate income consumers…We don’t find a lot of price sensitivity to this product.
NetSpend’s take is that while theirs is not the most affordable product on the market, low- and moderate-income consumers are not making decisions based on price. To that end, NetSpend leverages side benefits.
With a $500+ direct deposit – and bear in mind that less than half of NetSpend cardholders use direct deposit at all – NetSpend customers can upgrade to the Premier Account:
- A $5 monthly fee, down from $9.95
- Up to $8,000 in accidental death and dismemberment insurance
- A $10 purchase cushion
- A 5% APY savings account
The promotional 5% APY account deserves further investigation, as it could, conceivably offset the NetSpend card’s higher cost. But what balance would you need to make up for the Premier’s higher cost, relative to a cheaper prepaid and Ally Bank* savings account?
Assuming 2 ATM withdrawals per month and no cash loads, the Premier would cost $177.60** annually.
|Alternative||Annual Cost||Required Balance|
*We chose Ally Bank because it is nationally available, free and has no minimum deposit to open, so it’s reasonably accessible to most Americans.
**Includes $2.40 ATM surcharge
Given that many of NetSpend’s customers “don’t have enough extra cash to buy a full tank of gas,” according to Henry, it’s unlikely that they will be able to maintain that balance.
Moreover, there is reason to be skeptical of the 5% promise: it’s a promotional rate. Our analysis of savings accounts rates found that promotional rates are often twice as high as regular rates – and that the average promotional rate is a mere 0.33% for a one-year CD. The highest rate for a five-year, $2,500 minimum CD is 1.75%. It is unrealistic to expect that, in this period of exceptionally low rates, NetSpend will permanently offer uncapped, constantly accessible yields that are five times the average of a 4-5 year CD. If this benefit were broadly utilized, it would be unsustainable.
Even with these flashy promotions and perks, the NetSpend card cannot compete on cost.
Will the Liquid tide lift all boats?
Henry concluded that Chase and Amex’s marketing might would benefit his business as well: “The market is still so big, it’s not a zero sum game. If there is room for thousands and thousands of banks, there is room for more than one company in prepaid.”
True – but there’s room for multiple competitively priced products, not inexplicably more expensive ones. Chase, in particular, has no need to draw customers away from checking accounts. But with a message of “the better prepaid,” the Liquid and BlueBird have set their sights on NetSpend. Henry isn’t worried about these new players encroaching on his turf. He should be.
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