It was a busy Monday for banking news, with one big company rolling out a new prepaid card and another behemoth launching a small business loan program. There’s just one thing that makes this a little bit weird: Neither of the companies launching these initiatives are banks.
Walmart, partnering with American Express, announced it will begin next week offering a prepaid debit card called Bluebird. Google is going to start extending up to $10,000 lines of credit to businesses that want to buy Google AdWords, according to the Financial Times (via The Atlantic Wire). Google’s announcement comes on the heels of a report from e-commerce consulting company ChannelAdvisor that Amazon.com will begin offering loans to small businesses who use Amazon as a virtual storefront “to purchase inventory and increase your sales on Amazon.com.”
Clearly, there’s room for improvement when it comes to financial services: About a third of respondents in a recent study said they’re not happy with the service they get, with as many as a quarter of customers at some big banks saying they’ll switch financial institutions within the next year. But would we like our banks better if they weren’t banks? And would it help or hurt us to borrow from a search engine or have a store that sells everything from cereal to caulk oversee our debit card?
The answer to the first question is probably. A study conducted earlier this year found that nearly half of people who owned Apple products said they would consider banking with the computer company (not that Apple has any plans to start a bank — at least, not at this point). It’s bizarre, but it seems that a good customer service experience trumps all — even whether or not a company has expertise in a particular market.
(MORE: Would You Bank with Apple?)
This goes a long way towards explaining why prepaid debit cards endorsed by celebrities or associated with certain brands are popular, even if they come with high fees or terms that are unfriendly to the cardholder, which leads into the second question. Banks might not be thrilled with competition from the likes of Google, Amazon, and Walmart, but how will their participation in the financial services market affect regular people?
It depends. Walmart and AmEx tout Bluebird as a checking account alternative that doesn’t carry the risk of overdraft penalties or a bevy of fees. “The only fees consumers will ever pay are clear, transparent and within their control,” Walmart’s announcement says. Dan Schulman, AmEx’s president of the enterprise growth group, says the product was intended to help people “in an era where it is increasingly ‘expensive to be poor.'” And a recent study found that for all but the most financially responsible people, prepaid cards are cheaper, on average, to maintain than checking accounts.
Loans for small businesspeople could be a boon to the economy; traditional small-business lending never really recovered from the economic downturn. Credit cards fill in the gap, but the consumer protections in the CARD Act don’t apply to business cards. Although small-business owners generally have to put their own credit history on the line, they’re not protected from gotchas like any-time-any-reason rate increases, universal default, and high fees that the CARD Act eliminated for consumer cards.
According to the article about Google’s lending venture, “A pilot program in the United States last year showed that offering loans made customers advertise more.” And Amazon’s interest rate for at least some merchants is 13%, according to ChannelAdvisor, roughly the same as the average business card APR in CreditCard.com’s most recent weekly survey.
Like everything else, though, the devil’s in the details, and this is where the prospect of non-banks offering bank-like services worries consumer advocates. Just as a for-instance, this is how you wind up with prepaid debit cards — products primarily valued because they don’t let you spend more than you have — that offer expensive overdraft “protection” programs that more closely resemble payday loans than traditional credit cards. The Consumer Financial Protection Bureau has the authority to oversee non-banks as well as banks, but a lot of this supervision hasn’t been implemented yet and many services offered by non-banks fall into a regulatory gray area.
For the user, this means read the fine print and make sure you have a clear understanding of what you’re really getting from that product or service.