Checking accounts vs prepaid cards, Suze Orman edition

By Felix Salmon
January 10, 2012
liked it yesterday morning. The main reason is an interview she gave to GOOD:

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I still like Suze Orman’s Approved Card — but maybe not as much as I liked it yesterday morning. The main reason is an interview she gave to GOOD:

The majority of people who have these cards are called the unbanked and the underbanked. They do not have a bank account at all—unbanked—and even if they do have a bank account, what’s then happening is that they’re not using all the services that the bank is providing…

The 99 % movement, the Occupiers, is a very valid movement. It’s a movement that is very necessary. By the way, this card was developed for them, because this card which I have now created is a way for you to carry a little bank in your pocket with you. I’m actually asking the 99 percenters, ‘you best join me with this movement, people.’ If you want to keep your money in big banks, if you want to continue to get fees, if you want to continue to get all those things, you leave it right where it is. If you want to make a difference in your own life, how you use money, the accounting of money, everything about it, I am telling you put your money on me.

Orman, here, is destigmatizing the idea of being unbanked, which is very much in keeping with her “people first” approach to finance. If you’re going to provide a prepaid card to the unbanked, then it’s silly to lecture your customers on how they really should have a bank account instead.

But Orman goes further than that, to the point at which she’s actually encouraging the banked to become the unbanked — to close out their bank accounts and use the Approved Card as a checking-account alternative.

And I don’t think that’s a good idea.

Now I can see where Orman is coming from: the “move your money” campaign makes perfect sense in the context of big, heartless banks which charge enormous fees to people who can’t afford them. But I haven’t seen any impartial financial advice saying that the best place to move your money is a prepaid card, as opposed to a community bank or a credit union. The whole Suze Orman brand is centered on giving good financial advice — but Orman is helplessly conflicted now, and she’s giving advice which looks very much as though it’s mainly serving Suze Orman’s interests, rather than the general public’s. If she wants to make the case that people with bank accounts should become unbanked, she’s going to have to do so very carefully, spelling out her argument explicitly, because that advice is decidedly out of the mainstream.

On top of that, I also remembered the Amex prepaid card this morning — which looks in many ways even better than Orman’s offering, not least because it has no monthly fee. I get the feeling that they’re targeting different populations, but if you’re choosing between the two, and especially if you want a prepaid card to supplement your checking account rather than to replace it, then the Amex card, it seems to me, is probably the superior choice.

And there’s an Approved Card fee that I missed, yesterday, when I was writing about it. I said that the Approved Card would have to have great customer support; I didn’t notice that it charges $2 per call if you’re forced to call more than once in any given calendar month.

Jeremy Quittner of American Banker, covering Orman’s card launch, does nothing to assuage my concerns:

“Younger people are not interested in traditional checking accounts, they don’t write checks, and their need to write them has diminished, particularly with fees on checking accounts,” says Patricia Sahm, managing director of Auriemma Consulting, of New York…

Neither Suze Orman nor her representatives made themselves available to comment.

If Orman is serious when she says that “I couldn’t be more proud of this card if I tried,” then she should be extremely transparent and responsive when rolling out this product. And she should be very clear about whether she’s encouraging people in general, and young women in particular, to use her prepaid card rather than opening up a bank account.

I still think that people should have bank accounts. If you decline overdraft protection and just use the debit card which comes with your account, that behaves much like a prepaid card but has much more flexibility: for one thing, you can deposit cash into a bank account for free, while putting cash onto a debit card is non-trivial and costs money.

Do young people need checks? No — and there’s probably a case to be made for a new kind of financial product, a no-monthly-fee bank account without checks. Basically, what the Brits call a “current account”. Such an account would be at a competitive disadvantage with respect to Orman’s Approved Card, since a normal debit card is subject to Durbin limits on interchange fees, but prepaid debt cards are exempt from those limits, meaning that Orman can charge merchants a lot of money when they accept her card as payment. But from the perspective of what people like Orman like to call “financial wellness”, a bank account is, over the long term, surely always a Good Thing. And Orman shouldn’t be doing anything which discourages people from having one.

9 comments

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“Do young people need checks? No — and there’s probably a case to be made for a new kind of financial product, a no-monthly-fee bank account without checks”

This is basically what online checking accounts offered by banks like ING Direct and USAA are. No minimum balance, direct deposit and ACH transfers, a debit and ATM card, and even a small amount of interest on some accounts. Most of them even do offer checks, although usually you either have to have them printed and mailed by the bank, or pay a small fee to get a packet of checks.

About the only thing they don’t do better than a physical bank is depositing checks, which either have to be mailed in, deposited in a physical bank and transfered via ACH, or on some banks deposited via smartphone. That, plus the inability to make cash deposits and requiring reliable internet access are probably the main reasons the “unbanked” (or working poor) couldn’t just go with an online only bank. Since everyone seems to have theory about how to save USPS these days, having Congress authorize them to partner with banks to provide deposits other simple physical banking needs would probably solve a lot of these problems. Not that the Republicans would ever allow it in a million years, but it’s not that far fetched since they already do money orders and passports.

Overall though, I’ve been with ING Direct for 5 years now, and have had nothing but a positive experience with them. My only complaint is that their smartphone apps aren’t very good compared to some competitors, but as a bank they’re excellent.

Posted by mrmcd | Report as abusive

My son’s landlord does not accept debit or credit cards (and I suspect many property managers don’t, as they don’t want to pay the bank fees), so he has to get a cashier’s check every month to pay his rent. When I pay taxes, the state doesn’t want checks, but I send them one anyway and pay the 1% penalty, because I dont’ want to pay 3% or so for using a credit or debit card, and I don’t trust ACH. In theory, ACH is fine, but you are at the mercy of the company you are giving access to your bank account to (I don’t trust any of them or their software).

Checks will become obsolete when financial institutions don’t charge you to use your own money.

Posted by KenG_CA | Report as abusive

My college kids have a credit union checking account that’s linked to their savings account. They use the debit cards associated with it for everything. They barely know what cash is and really don’t want to carry any. Right now they don’t need checks since we can pay rent online. If they overdraft, it’s just a small fee for a service charge and money is automatically transferred from the savings account. (I know. We’re working on it. But this is vastly better to the $35 charges the bank got.) There is no fee associated with this set up outside of any overdraft situation. I realize that this requires a savings account, but it’s just $25 to open. Look around at credit union options. It’s usually like doing business with yourself. I know that an option like this is not available to everyone, but it’s vastly batter than the original bank-based option we tried.

Posted by ComradeAnon | Report as abusive

“Since everyone seems to have theory about how to save USPS these days, having Congress authorize them to partner with banks to provide deposits other simple physical banking needs would probably solve a lot of these problems.”

The salary structure and work rules at the USPS is too far out of whack for this to be feasible. Would cost them at least double your typical bank to process deposits, and banks are already finding that is unprofitable for smaller accounts.

Posted by TFF | Report as abusive

I have to think that even young people need at least some checks, and I say this as someone who uses a combination of online bill pay and automatic ACH to take care of all regular monthly bills such as credit card, utilities, cell phone, mortgage, and cable. That said, there are some situations where it seems like the best or easiest solution is to mail in a check along with a required form. Some government taxes and fees come to mind – property tax and renewal of vehicle registration. It’s possible (at least here in Austin) to pay those by credit card, but the state charges a fee for doing so. Avoiding that 1% or 2%, especially on property taxes, more than covers paying $10 or $15 for some checks every few years. Seems like checks are also the way to go for paying service providers like a plumber, etc. Even as smartphone options to swipe credit and debit become more prevalent, I’m betting that a lot of these providers will still want to avoid interchange. To echo Ken_G’s point, I think that a lot of people also pay rent by check – I used to when I was renter – both since property managers don’t want to pay interchange and since the renter wants to drop off a check on a specific date.

Posted by realist50 | Report as abusive

I agree with mrmcd that the ‘electric orange’ account from ING meets the description outlined by Felix for the no-monthly fee checking account without physical checks. Suze Orman is just shameless with her huckstering; while there are LOTS of worse prepaid debit cards out there, even young people should realize there are better ways to go than even her branded card.

Posted by Strych09 | Report as abusive

Felix,

I’m surprised that you like this idea *at all*. Suze has gone from being a reasonably reputable consumer and personal finance advocate to a complete huckster and a shill for the debit card providers. Trying to piggyback on the 99% and Occupy movements makes it even worse. I’m thankful that this idea is so stupid and transparently so that it will die on its own in short time.

Mike

Posted by mkeenly | Report as abusive

You can rent a car using a debit card associated with a checking account. You cannot rent a car using a pre-paid card. This, by itself, is an argument for keeping the checking account, is it not?

Posted by randyhilst | Report as abusive

Have to give the media a big fat “f” on this. She’s being invited on all the shows to promote her card and making it all seem like she’s a non-profit and not self-promoter.

Posted by Sechel | Report as abusive