There are currently eight suppliers of what would generally be considered prepaid card Bank Lite products in the UK but how do they compare in terms of benefits and costs to the consumer? David Parker analyses the growth of and prospects for lite current accounts
Whether one agrees with retailers that lower interchange fees are good, or with others that lower interchange fees constrains innovation and will not allow for premium loyalty based cards for users the move to a lower interchange environment in Europe looks very likely by the end of 2015.
Visa and MasterCard, would be capped at 0.3% of the transaction value for credit card transactions and 0.07, or 0.2% of the transaction value (whichever is lower), for debit card ones.
One of the results of this is we are likely to see a dramatic change in the current account market. Currently for most people in the UK banking is free. Research by Chang, Evans, and Joyce point out that because banks can decide how to distribute their costs, in a variety of fashions when they lose money due to lower interchange fees, banks respond in a number of ways including reduced services, lower interest rates, more costs and so on.
Thus whilst banks will always want to service customers with nice large monthly salary checks, the question is how will they handle those on low incomes, further there are some one million people who can’t get a regular bank account due to poor credit history in many cases.
After all the OFT reported:
- 94% of UK adults have a bank account;
- 40% have more than one;
- 76 million PCAs in the UK, and
- 61 million+ are used regularly
But Packaged accounts while maintaining a market share of 14% in reality represent nearly 20% of active accounts.
The UK banks have responded with their ‘Basic Bank Accounts’ and Virgin Bank was the latest to announce in July they will be launching an offering. But the key question is what will happen to these accounts when the new interchange levels kick in, how will banks continue to offer these accounts or will they as many expect start to have to charge for these types of basic bank accounts, much as happens in other markets such as Italy.
Further while they represent only 9% of all accounts just as with packaged accounts the proportion that are actually active is actually higher.
And it is this potential change on the horizon that has started to see a new range of prepaid cards being launched called ‘Bank Lite’ solutions. What we mean by this is a Prepaid Card, often with an E Money Wallet sitting behind the card, the ability to do payments from the card using Direct Debit, sometimes with additional savings/dedicated use purses. The APS product has even gone further and created a credit repair function; as Rich Wagner CEO of APS told RBI:
"I like Credit Repair because no matter what stage you are in life there is always a need and desire to improve your credit score. It should be noted that Credit Repair was not just for people repairing bad credit; it also served a consumer segment that was just started out and needed to create some credit history."
These new ‘entrepreneurial’ Bank Lite products have been set up with often strong beliefs that the existing current account market is not delivering, as Steve Round, CEO of the Chang Account stated:
"I wanted to create an account that I would want but that was available to all. It had become common practice in my opinion to offer a second class product to individuals on lower income and I wanted to offer a first class product but with all the support mechanisms in place, through the founder partners such as Advice UK, PayPlan, Street UK, Homeless Link and London Rebuilding Society that would help people change their behaviour".
Alex Letts, CEO of Ffrees felt it was more about the moving face of technology that allowed them to create their solution.
He told RBI: "The advent of API based services has allowed the banking industry model to be re-thought as a series of separate data services rather than as a single massive product-set. The core service is the current account, and this drives most customer activity and requirements. We have chosen to lead the way in re-inventing the way that consumers relate to this service, and access, manage and spend their money."
There are currently 8 suppliers of what would generally be considered as prepaid card Bank Lite products in the UK, although two companies offer a number of different programme variants e.g. pay as you go/pay monthly /premium.
5. Secure Trust Basic Bank Account
6. Talk Home
7. Think Money
8. Tuxedo eccount money
Average fees for the Bank Account Lite linked cards tend to be lower than the GPR card average as extracted from Polymath’s latest full prepaid card report (base of 59 cards)
- The average purchase fee for the Bank Lite cards is £5.41 which compares favourably with the overall average for GPR cards of £6.78;
- The average charge for ATM use is £0.58 compared to a GPR cards average of £2.02;
- Transaction fees (average £0.05 for a £25 transaction) are much lower than for GPR cards (average £0.20 for a £25 transaction);
- Charges for ancillary services such as replacement cards and account closure are largely similar, and
- Card balance limits, whilst not excessive, are more than adequate for most users
It is the monthly management fee where we see the difference in these cards as the GPR cards average is £2.45 per month, but the Bank Lite cards average out at £6.87 per month, excluding some free ones would be around £9 a month. So by paying a monthly fee the cardholder is avoiding or reducing other fees as one might expect.
In addition buying into some of these accounts gives access, in some cases, to other tailored benefits such as loyalty programmes and discount schemes at retail outlets.
We have also looked at usage scenarios for the cards; in the first scenario we have assumed reasonably extensive use of the card for purchases with the occasional withdrawal of cash each month:
- Cost of purchase
- Initial Load £1500
- 11 X Salary of £1500
- 11 X Monthly Fee
- 2 X ATM of £100 per month
- 32 X Purchases of £40 (UK) per month – Total Withdrawal
- The second scenario varies the usage of the card a bit:
- Cost of purchase
- Initial Load £1500
- 11 X Salary of £1500
- 11 X Monthly Fee
- 10 X ATM of £75 per month
- 20 X Purchases of just under £40 (UK) per month – Total
payments of £750 per month
So what of the future: will banks become more transparent with their costs? With the current CPA review underway further changes are likely in the traditional current account market and potentially re the transparency of how banks make money from them?
Alex Letts commented: "Well there is a significant cost in current accounts already actually; it is just that the banks are not being transparent about this by cross subsidies, or by charging high penalty fees..
"There is no such thing as a free service. The current CPA enquiry will inevitably conclude that "Free" at the point of sale current account services are not actually free, as someone somewhere is paying I expect the banks to anticipate this and start to become more transparent about the cost of having a current account in 2015".
But will this see a continued growth therefore in the Bank Lite solutions, Rich Wagner felt: "With a more modern ability to acquire and service customers via strong digital enablers alternative providers like us can break down and eliminate the complexity of traditional banking.
"If done well, customers will migrate to someone they trust and to someone who can make banking and payments simple." And Steve Round argued that these types of products will move beyond just the current unbanked.
"It is my belief that many people – not just on low incomes – are ready for change and given that a banking lite product needs to have all the functionality that a traditional account has – faster payments, direct debits etc – and that the costs are clear and transparent – then yes I do believe that. Again though it is up to the providers to deliver this alternative".
But perhaps the final comment should be from Alex Letts who states a key fact:
"The truth is that is cheaper to run a current account on e-money (as in "pre-paid") rails rather than on the massive and expensive full banking rails. Hence neo-banks like Ffrees can out-compete the old style banks with their current accounts."
So maybe the real question is will we see the mainstream banks start to segment their current account portfolios and look to move the more unprofitable customer/basic bank account off their core banking system and onto an e-money based Prepaid Card Bank Lite solution?
This has also important implications for regulators of course as the FCA has only recently been highlighting to consumers that their funds are protected in a bank, but as e-Money whilst the funds are segregated, they are not covered by the FCA £85,000 protection.