"For years I heard from mothers, children in tow, waiting in lines for their paychecks, then in more lines to expensively cash those paychecks, then in even more lines to pay their bills," Simmons would later write. "Truth be told, these Americans couldn't afford the 'minimum deposit levels' required by large banks to avoid monthly account maintenance fees."
This month, though, some RushCard customers have not been able to access their money for nearly two weeks due to what appears to be a technical malfunction. Paychecks deposited directly onto the cards simply vanished. The economically vulnerable people Simmons had sought to help were suddenly left in a precarious spot.
It is unclear how many people were affected and whether the problem is completely resolved. Simmons's company said in a statement last week that it still couldn't provide current balances for "a handful" of customers, and that the company was working with them individually to correct the remaining errors.
“This has always been my mission,” Simmons said in the statement, “to financially empower those families that have been shut out of the economic mainstream.”
The disruption has exposed prepaid cards to more criticism from advocates for consumers who see the products that Simmons helped introduce as sleazy and disreputable.
RushCard marked the beginning of a financial fad. Among the first prepaid cards, many others were also endorsed by celebrities, including Kim Kardashian and Justin Bieber. These cards imposed small, frequent fees on users that became exorbitant over time. RushCard’s fees weren’t cheap, either. The new cards developed a lousy reputation.
“This fiasco reveals potential gaps in the protection of consumers who use prepaid cards,” Lauren Saunders, associate director of the National Consumer Law Center, said in a statement. She and other advocates are urging regulators to lay down rules for prepaid cards. The federal Consumer Financial Protection Bureau announced Friday it was monitoring the situation with RushCard.
But as debate continues over how to regulate the new products, the market is maturing. Competition from major financial institutions has reduced fees, and the cards are quickly becoming popular. Americans now use them more frequently than they write paper checks. Prepaid cards are transforming the way the poor in America manage their finances, and often for the better.
As of last year, RushCard had more than 500,000 customers, many of them likely financially vulnerable. On social media, customers have been complaining to Simmons that without access to their money, they are going hungry or facing eviction.
About 68 million Americans relied on financial services outside of a conventional bank to cash checks, borrow money and more in 2013, according to federal data, generally because they lacked the funds to maintain a balance at a bank.
Everyday business can be an expensive hassle for those without checking accounts. Some buy money orders, while others rely on cash for many transactions. Some pay their rent and utility bills in cash, too. Doing so often means paying fees to cash checks, and then there is the risk that the money will be stolen.
Simmons hoped to save those households a little money. These days, though, many families might find they save more with a different prepaid card.
On RushCard’s Pay As You Go plan, customers pay no less than $1 per transaction to use the card like a credit or debit card at the point of sale, whether to buy groceries or a new pair of shoes (according to Bankrate, a firm that collects data on interest rates and fees). These fees are capped at $10 per month.
RushCard’s other plan charges a flat monthly fee of $6 to $8. Other cards, such as Chase’s Liquid or Wells Fargo’s EasyPay, charge a flat fee per month of about $5, and users avoid the fee they would pay to make their first deposit on a RushCard.
However, Bluebird, the card issued by American Express in conjunction with Walmart, has none of these fees. Experts said cards with minimal fees can be profitable for large retailers, which save money on their own banking costs when customers use the cards to make purchases.
The entrance of large national and regional banks with attractive offerings like these has changed the market for prepaid cards.
“They have the most compelling offers, and they have cards that really, quite frankly, are a good value proposition,” said Bankrate’s chief financial analyst, Greg McBride. “Nobody over the age of 19 was ever going to get the Justin Bieber card.”
When Bieber released his card in 2013, reviewers panned its complex and costly fees. Other cards endorsed by celebrities, such as Kardashian, Magic Johnson and the financial planner Suze Orman, have been discontinued. The issuers were unable to compete as major financial institutions entered the market with more attractive offerings.
Prepaid cards are less expensive to administer for the banks, since they don’t carry the costs of handling paper checks and complying with regulations associated with conventional checking accounts. As a result, these financial institutions can reach a group of financially distressed consumers who don't have enough money to make a traditional bank account profitable.
Reduced costs allow issuers to offer their customers protection from overdrafts, an important source of revenue in traditional checking accounts. Instead of charging a hefty fee as a conventional bank would, most prepaid cards simply won’t process an overdraft. That gives customers more confidence about their finances, according to a survey conducted by the Pew Charitable Trusts.
About 7.9 percent of American households used a prepaid card in 2013, including 11.5 percent of black households and a similar share of households with annual incomes under $15,000, according to the Federal Deposit Insurance Corporation. Data from the Federal Reserve Bank of Atlanta show that the number of transactions on prepaid cards, effectively zero when Simmons founded RushCard, has been increasing at a rate of about 34 percent a year.
Mike Moebs, founder of the economic research firm Moebs Services in Lake Forest, Ill., estimated that more transactions were completed with prepaid cards than with checks last year. Moebs is optimistic that this new financial product will save precious money for America's poor, calling it among the most important innovations in payments in six decades.
“It helps lower-income people a lot,” Moebs said.
The Consumer Financial Protection Bureau has proposed rules for the new cards, which are largely unregulated. Moebs agrees on the need for guidance to protect consumers, but he worries that Washington will overly restrict the market if regulators focus on the arguably predatory fees and unreliable service associated with a dwindling number of cards marketed by celebrities.