Viewpoint: RushCard Disruption Reveals Why Prepaid Debit Cards Should Not Exist At All
Monday, October 26, 2015
It’s a sad truth of American life that the poorer you are the more you pay for banking. And as thousands of Americans have discovered this month, it can also be very perilous to live outside the mainstream banking system. But there may be a solution on the horizon – one unused since the 1960s.
Thousands of holders of one of the most popular prepaid debit cards in circulation, the RushCard, founded in 2003 by hip-hop mogul Russell Simmons, found themselves unable to access their funds for the better part of two weeks. Blocked from buying groceries and medication, getting hold of cash they needed to pay their rent or purchase gas for their cars, they have been venting their fury at both the card and the organization on social and traditional media.
There are certainly plenty of reasons for RushCard’s holders to be livid, especially given the initial vague response: the company blamed a “technology transition”, while Simmons himself simply said he was “praying” for those affected, in asince-deleted tweet.
But this isn’t a problem limited to RushCard. The Pew Charitable Trusts reported in June that about 23 million Americans use prepaid cards such as RushCard regularly, up about 50% between 2012 and 2014, with many treating them like bank accounts and having their pay checks directly deposited to the card. That backfired badly when those direct deposits went through, only for cardholders to find that their money is now in limbo, inaccessible.
It’s not the first time that a prepaid debit card backed by a celebrity and marketed directly at the financially most vulnerable segment of Americans has encountered flak. Last year, Suze Orman and Bancorp Bank shut down their Approved Card project, a two-year-old venture that differed from some of the prepaid rivals in that Orman had convinced TransUnion, one of the big credit rating agencies, to look at the data collected from cardholders. Part of the card’s marketing pitch was that this might be a way for Americans with poor credit to rebuild their all-important FICO scores. Not only did that not seem to happen, but the layers of fees left many observers shaking their heads in disbelief: the $3 initial monthly fee might seem lower than rivals, but by some calculations, the minimum annual cost to use Orman’s product for a typical “unbanked” American came closer to $81.
Still, for some observers, the real problem isn’t with prepaid debit cards, but with the reason they exist at all, and the reason so many millions of Americans are flocking to them, and treating them as (costly and high-risk) alternatives to plain vanilla checking accounts at ordinary banks.