J.P. Morgan Chase & Co. (JPM) is test marketing a reloadable prepaid card in about 200 branches, moving to the forefront of a growing field of banks that are adding the alternative financial products to their menus to attract new customers and keep existing ones in the face of new regulations.
Chase, the largest U.S. lender by assets, is the latest to begin offering the cards, which until recently have been mainly pitched to low-income consumers by alternative financial-services firms in pharmacies, supermarkets, check cashers and online.
Mainstream lenders like Chase have been expected to get into the prepaid market as new regulations cut into banks' traditional fee income from credit- and debit-card customers. At the same time, regulators are eyeing the products for fee disclosures, which some consumer advocates have complained are rife with high and hidden costs for customers.
On that front, Chase appears to be ahead of many of its competitors. Its new Chase Liquid card carries a monthly maintenance fee of $4.95 and doesn't charge customers for loading money to the prepaid account, withdrawing cash from Chase ATMs and tellers, receiving paper statements and other services that competing products often charge for.
"What we did is design a product for customers who want a low-cost alternative to traditional checking accounts and banking accounts, and for people really looking for the control and flexibility of the design that we put in place," said Ryan McInerney, chief executive officer of consumer banking for J.P. Morgan Chase, in an interview.
With the new prepaid card, J.P. Morgan Chase joins smaller competitors, including U.S. Bancorp (USB), BB&T Corp. (BB&T) and Regions Financial Corp. (RF), which recently rolled out a suite of services that include check cashing and prepaid cards to cast a wider net by offering new products in their branches.
American Express Co. (AXP), which primarily issues credit and charge cards to affluent customers, last year also began offering a low-cost prepaid card it is partly targeting to prospective customers who may not qualify for one of its traditional products. The lender is analyzing the usage patterns of its prepaid cardholders to determine if they might be a good fit for a charge card over time, executives have said.
J.P. Morgan Chase will analyze how customers use the new card to determine if it is "still the best fit for them" or "does their behavior and spending patterns on this product make" them a "good fit for another Chase product," McInerney said. Chase plans to roll the product out nationally this summer.
J.P. Morgan Chase's move comes as the bank and other large competitors are reeling from new regulations that are cutting into revenue from credit and debit cards.
The Durbin amendment, which took effect in October, cut nearly in half the amount of fees big banks like Chase and Bank of America Corp. (BAC) can charge merchants every time a consumer swipes a debit card. The rules included an exemption for many kinds of prepaid cards, which means those products can still earn higher fees from merchants. Separate rules that took effect previously also require banks to get customers to opt in to certain forms of overdraft protection.
Combined, those two rules are expected to wipe out more than $12 billion in annual revenue for banks, according to Javelin Strategy and Research, on top of billions of dollars lost to new credit-card rules that took effect in 2010.
About two-thirds of customers with less than $100,000 in deposits and investments will be unprofitable to J.P. Morgan Chase because of new regulations, Todd Maclin, CEO of Chase consumer and business banking, said during the bank's investor day in February.
The bank has been aggressively courting affluent customers with services including Chase Private Client and credit cards like Sapphire, which is targeted to top spenders.
But McInerney said the bank "looked at our product lineup" and "felt we had a gap."
"We feel we built the best product out there to fill that gap and that product lineup, and that's Chase Liquid," McInerney said. "We hopefully will attract a set of new clients to the bank ... and it's quite likely we've got some clients here today who will see this product being a better fit for them."
McInerney did not say what the target income group is for Chase Liquid or whether the bank sees the product as a way to appeal to customers who may be upset about changes to fees on traditional checking accounts.
Many banks have raised minimum balance requirements and other terms customers must meet in order to waive monthly checking fees on certain accounts, though Chase says it has reduced or eliminated several existing fees for things like closing accounts within 90 days of opening, account research fees and account transfers to cover overdrafts.
Alternative players like Green Dot Corp. (GDOT), NetSpend Holdings Inc. (NTSP) and Western Union Co. (WU), which offer their own prepaid cards in places like 7-Eleven, Walgreen Co. (WAG) and Wal-Mart Stores Inc. (WMT), say they have reaped the benefits of rising bank fees as consumers close accounts to pick up one of their products.
It is unclear whether traditional banks' entrance into the prepaid-card market may pull back customers who may have opted for an alternative provider, though it is likely to put pressure on existing players, particularly on the fee front, experts said.
"We love to see more competition in the prepaid card market and we are happy to see banks offering prepaid cards as long as that's not a substitute to their duty to serve the entire community with their traditional bank accounts," said Lauren Saunders, managing attorney for the National Consumer Law Center's Washington, D.C., office.
The group has pushed for more transparent disclosures of prepaid card and traditional bank account fees. Chase's approach stands out because cardholders can conduct all of their activities inside of branches and using Chase ATMs, Saunders said.
"We like the fact these cards will be treated like other products that Chase offers and not as a second-class product," Saunders said.
Customers who use the cards can refill their cards with cash and checks at Chase branches as well as its 10,500 ATMs that are equipped to accept deposits free. They also can withdraw cash at all of its 17,500 ATMs and branches free, and receive account alerts via text or email.
"It certainly is an aggressive kind of an approach to say you can use all of our ATMs and all of our branches and bring all of your cash and checks to be deposited in our branches," said Ben Jackson, senior analyst in the prepaid advisory service at Mercator Advisory Group. However, Chase and other banks may face challenges getting customers who want a prepaid card to come to their branches, he said.
"The big issue that I think they face is a lot of the people who are the low- and moderate-income users of prepaid [cards] have left banks," Jackson said. "They've cautiously said I don't want to work with a bank, and so to have a prepaid card that is branch-focused I think could be a handicap for reaching some of those customers."
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; email@example.com