Frustrated with your bank’s surprise fees and minute interest rates? Shop at Walmart? You may find a solution to your woes in an unusual but convenient location: on the “Every Day Low Price” stores’ shelves. Bluebird, the child of a Walmart and American Express partnership, will offer a prepaid, easy-to-refill, low fee debit account and card that aims to attract disgruntled bank customers and millions of “underbanked” households. The product is poised to change the banking industry (to the dismay of banks) by offering traditional banking services from a non-bank, but consumer activists have voiced concern over the legitimacy of Walmart’s foray into banking and the potential for abuse in the relatively unregulated area of prepaid card accounts.
In its quest to be America’s neighborhood “everything” store, Walmart has taken aim at the personal banking industry. The “underbanked” market, populated by “customers who use few, if any, bank services,” is estimated to be worth around $45 billion. The unlikely pairing of discount retail behemoth and high-end financial company will attempt to create a new tier in personal banking for many of the “underbanked” who feel that they are “paying too much for simple banking activities.” The deal makes sense for both AmEx and Walmart, who have long desired to expand into each other’s markets. AmEx, usually associated with high-end customers, now has access to middle America through Walmart’s near four thousand stores nationwide, while Walmart, who has attempted to expand into the banking world in the past, adds yet another reason for customers to stop by their superstores. Bluebird will do away with a number of potentially infuriating aspects of traditional personal banking such as minimum account balances, and monthly, annual, overdraft and ATM fees (at nearly 22,000 ATMs), though some charges may apply depending on account type. Further, it will borrow successful personal banking components from the same traditional banks including direct deposit, person-to-person transfers, smartphone photo check deposits, and mobile payments. No credit check is required to become a user, and the cards will be usable anywhere American Express is accepted. Bluebird will clearly be attractive to lower income families and individuals who use have little use for their banks other than simple personal banking, or who don’t qualify for checking accounts due to their credit history. The accounts may additionally draw in higher income families for use in budgeting or as ‘starter’ bank accounts for children. While, at least at first glance, Bluebird appears to be a creative new product that has the potential to satisfy a largely neglected group, bank lobbyists and some consumer activists will undoubtedly disagree, citing danger to consumers and questioning the offering’s legality under banking regulations.
While the prepaid card market is booming in size, growing from $27 billion in 2009 to an anticipated $90 billion by 2014, it is also relatively new, causing the market to have outgrown the regulatory attention paid to it in the past. Of concern to consumer activists is that such prepaid accounts are not necessarily protected by the Federal Deposit Insurance Corporation or by Dodd-Frank. Financial services companies including J.P. Morgan, U.S. Bank, and Wells Fargo have already delved into the market that the Consumer Financial Protection Bureau has described as unregulated and lacking in consumer protections. “Advocacy groups have questioned whether prepaid card issuers clearly explain to cardholders the fees that come with products, including charges to activate the card, load money on it, check a balance at cash machines and speak to customer service.” However, Walmart and American Express have ensured that in using Bluebird “[t]he only fees consumers will ever pay are clear, transparent and within their control.” Another issue that has been raised regarding Bluebird concerns the ‘creative’ structuring of the prepaid card’s transaction processing. When credit or debit cards are used, the charging store is levied an “interchange fee” from the cardholder’s bank in facilitating the transfer of funds. These fees are often hidden from cardholders, who are often ultimately the ones to bear the cost. Though they vary, “interchange fees” for credit card average around 2% of the transaction, and debit card fees are capped at $0.21 per transaction, both regulated by the Durbin Amendment to Dodd-Frank. Banks are estimated to make “over $30 billion a year from interchange fees alone." In order to offer this revolutionary banking product to help low income earners, Walmart and American Express are bypassing the consumer protection provisions of Dodd-Frank intended to protect this same group. American Express does not charge “interchange fees” but “merchant discount fees” which effectively allows Bluebird transactions to be treated like traveler’s checks. “Presumably, by using this technique, Wal-Mart avoids Durbin and it can receive whatever “commission” American Express chooses to pay on these cards.” This both deprives banks of both their leverage and potential revenue and allows for the potential abuse of the unregulated fees by Walmart and American Express.
Despite the appearance that a loophole in Dodd-Frank is central to the product, I think that Bluebird is poised to be a huge win for consumers. There is no evidence that Walmart or American Express have any ill intentions in regard to their free-reign over the “merchant discount fee,” and I believe the advantages to both partners are too large to jeopardize by playing games with their customers. Walmart wins here in multiple ways. They are offering an attractive new product that appeals to their target customers and their largely unsatisfied banking needs. This will potentially entice existing customers to visit Walmart stores more often, to spend more money, and new customers who just might do some shopping while they are attending to their banking needs. There have been a number of recent advances in banking and personal finance that have made it easier for the public to complete money-related tasks, however, none have truly threatened to loosen big traditional banks’ stranglehold on personal banking . Here, Walmart and AmEx offer a new tier of banking, where many of these “underbanked” will find all of their personal banking needs met without the extra complexity and frustration of traditional banks. Bluebird and similar future products will force traditional banks to reevaluate their practices and to eliminate unnecessary fees in order to compete. Undoubtedly, banking lobbyists and consumer activists will campaign to have the Durbin and other Dodd-Frank loopholes closed to prevent Walmart from “acting as a bank” and to classify American Express’s “merchant discount fee” as an “interchange fee.” However Walmart may belong to the minority of companies that is equipped to compete in such a battle. The fact that an innovative solution is on the outskirts of existing regulation is not reason alone for denying its merit.