JPMorgan Joins Bank Influx Into Prepaid Debit Card Market

| About: JPMorgan Chase (JPM)

While JPMorgan Chase (NYSE: JPM) has dominated the headlines for the past week due to its derivative trading debacle, there is a news item that gained less attention, but is important to point out. The bank has entered the prepaid debit card market, which is growing in popularity and offering another source of income for banks following the implementation of financial overhaul laws.

Just last week, Fitch Ratings issued a report detailing the growth of the prepaid debit market. It noted that the increase is due to U.S. banks looking to offset revenue reductions resulting from the infamous Durbin amendment. It was attached to the Dodd-Frank Act that was meant to address inequities in the banking industry. For banks, the amendment could, on average, cut potential fees on debit card transactions by one-half, according to Fitch.

The rating agency noted that the impact on card fee generation by Durbin has prompted many banks to impose new fees on ancillary products, like checking accounts, leading to the loss of customers. This leaves the prepaid card market ripe for growth, as more people look for alternative banking sources because they have fewer options.

The amendment, which took effect in October, has consistently come under fire because it significantly curtails revenues big banks receive from processing credit and debit card transactions. It capped interchange fees that banks could charge merchants for each transaction at $.24. It had averaged $.44 per transaction.

However, the new banking reform regulations do not limit the fees financial institutions can charge merchants that process prepaid debit card transactions. This loophole is becoming somewhat of a saving grace for big banks, especially considering the growing market for prepaid debit cards.

Estimates place the amount of loss revenues due to the amendment at more than $6 billion a year starting in 2012. Banks are standing to lose another $5.6 billion a year because of restrictions on overdraft fees.

On the hunt for ways to make up for this loss, banks have turned their focus to prepaid debit cards. This part of banking has grown tremendously, especially over the past five years as more people are unable to get traditional bank accounts. They are referred to as under-banked or unbankable because they do not qualify for traditional checking and accounts or credit cards. For many, the only alternative are payday lenders that offer check cashing services and other financial assistance. Unfortunately, the fees for these services can be excessive.

That's why I think it is important that JPMorgan Chase and other financial institutions are offering prepaid cards. I also find it telling that JPMorgan Chase, the largest bank in the country, has chosen to step into this industry. Unscrupulous companies had given the industry a bad reputation mainly because of the exorbitant fees they charge customers who could least afford them.

It is no longer the case that the main people using prepaid debit card are those with poor or bad credit. More people are turning to the cards for several reasons, which include trying to control their spending. It is estimated that consumers will load roughly $160 billion onto prepaid cards in 2014.

JPMorgan Chase announced its reloadable card, called Chase LiquidSM, earlier this month. It is being rolled out as part of a pilot program at 200 of its branches. Consumers will be able to get the debit card for a reasonable $4.95 per month. The bank requires a $25 deposit. There is the normal ATM withdrawal fee, but other than that, there are no excessive fees that can be found with other prepaid cards. This should be attractive to consumers because others offering prepaid cards are charging up to $15 per month, and have myriad fees that range from reloading the cards with money to checking the account balance.

In offering the prepaid card, JPMorgan is joining a growing list of financial institutions offering prepaid cards. They include American Express (NYSE: AXP), Bancorp (NYSE: USB), BB&T (NYSE: BBT) and Regions Financial (NYSE: RF).

As the prepaid debit market continues to grow, it would behoove more banks to get in it. The timing could not be better.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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