By David Henry
NEW YORK (Reuters) - JPMorgan Chase & Co is seeking to move its least profitable checking customers into new prepaid debit card accounts to boost earnings in a business crimped by new regulations.
The cards work like checking accounts except that customers cannot write checks and overdrafts, and instead they pay with a swipe or by entering the card number on a website.
A loophole in the 2010 Dodd-Frank financial reform law allows banks to charge merchants higher fees for processing payments made with this type of debit card.
Chase said on Tuesday it will market the cards - with a relatively low $4.95 monthly fee - mainly to people who frequently overdraw their accounts, keep low balances, or do not qualify for a checking account at all. It is not adding extra fees for deposits or withdrawals at its ATMs or branches.
The move could pressure other debit card issuers to reduce fees and could prove to be a low-cost way for the industry to provide basic financial services to people who live paycheck-to-paycheck.
These customers have become a millstone for banks across the country after new U.S. regulations limited overdraft fees that banks can charge. A prepaid debit card cannot usually be overdrawn.
Chase, the bank's retail arm, hopes the prepaid debit card will help it avoid the negative publicity that overdraft fees can garner. Many consumer advocates view those fees as a stealth tax on the poor.
Prepaid debit cards can carry high fees as well, but JPMorgan Chase says its card is among the cheapest available for the average consumer.
Many banks are going the same route as JPMorgan Chase and moving unprofitable customers into prepaid debit cards. The product generates fees and also lowers the cost of maintaining the account, said Todd Maclin, who heads Chase's consumer and business banking unit.
"When we get out of the overdraft business, we also get out of the check business, which means we get out of the paper business, which means we also get out of a lot of processing, which means we save a lot of money," Maclin said in an interview.
Between new regulations on fees and low returns on customer deposits as interest rates have dropped, JPMorgan Chase estimates that about 10 percent of its accounts do not generate enough revenue to cover their incremental costs, such as check processing and deposit insurance.
Chase, the third-largest U.S. consumer bank, aims to spend less on those customers while spending more to attract high net-worth individuals who will more than pay their way with purchases of investment and savings products.
Maclin said the bank will seek out the roughly 10 percent of customers who do not qualify for free checking and pay fees of about $12 a month. "We are going to call all of them and tell them that we have a product that costs $4.95 a month and you can do almost everything but write checks," he said.
This soft approach is a reversal from when banks would try to force customers to change their ways by charging new fees.
It follows the outrage Bank of America Corp met last fall when it tried impose a $5 monthly fee for debit cards that had been free with checking accounts. Bankers are also wary of doing anything that would stoke public anger over the role of banks in the financial crisis.
BREAKTHROUGH OR FLOP?
JPMorgan Chase announced its prepaid debit card plans at an investor conference on Tuesday. Responding to a question at the conference, Maclin said he accepts the fact that cards will likely reduce the bank's revenue from checking account fees. But it is a trade he is ready to make because the bank's cost to serve many of those accounts exceed the revenue, he said.
Adam Rust, research director of advocacy group Reinvestment Partners in Durham, North Carolina, who has been critical of the prepaid card industry, said the new Chase card "provides important services at a low price."
"This is good competition and there is lots of access to ATMs," he added.
JPMorgan Chief Executive Jamie Dimon said in his annual letter to shareholders in April that the product "could be a breakthrough product for consumers in terms of pricing transparency, convenience and simplicity."
"The management team doesn't want me to get too excited in case it doesn't work," he added. He did not mention the prepaid debit card by name in the letter, but a person familiar with the matter confirmed he was referring to the product.
The cards have been offered in a pilot program in two states for a few weeks, and will be available in Chase's 5,500 branches in 23 states by the end of summer.
Prepaid debit cards give banks a way around rules linked to a provision of Dodd-Frank known as the Durbin amendment, which limits fees charged to merchants for processing conventional debit cards to about 0.25 percent of the transaction value.
There are no limits for prepaid debit cards, which typically charge merchants about 1.70 percent, said David Robertson, publisher of the Nilson Report. For credit cards, the rate is about 2.05 percent.
Big banks are muscling in on a product that before Dodd-Frank was largely offered to low-income consumers by specialty companies, such as Green Dot Corp, NetSpend Holdings Inc and Meta Financial Group.
Banks such as Minneapolis-based U.S. Bancorp and Birmingham, Alabama-based Regions Financial Corp are also using the card to attract customers that might otherwise use check cashing services.
In June, American Express started offering prepaid cards in a bid to expand its payments business beyond the wealthy, its traditional customer base. American Express, like Chase, says that its cards are low-cost compared to others.
Fees for prepaid debit cards vary widely, and can be levied for putting money on the cards, making payments, and withdrawing cash from an ATM, among other things. According to website NerdWallet (http://www.nerdwallet.com/prepaid/), in one common scenario for how consumers add money and take money from their cards, yearly fees range from $37 to more than $400.
The Chase card and the U.S. Bancorp card are among the least expensive prepaid debit cards for consumers. Unlike many other cards, their monthly fees are low and they do not charge extra for typical checking account services, such as accepting cash and check deposits or using ATMs, said Anisha Sekar, vice president of credit at NerdWallet.
While deposits are free with the Chase and U.S. Bancorp cards, on other cards it can cost as much as $4.95 to add money.
(Reporting by David Henry in New York; Editing by Tim Dobbyn and Richard Chang)