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Russell Simmons, Interchange Crusader

posted by Adam Levitin

It's amazing who the interchange debate will bring out of the woodwork.  Hip-hop entrepreneur Russell Simmons has been making the rounds on Capitol Hill (and on Huffington Post) urging Congress not to act on interchange reform.  Why is Simmons so engaged with this issue?  

The answer is because he makes a lot of money off of interchange from a very questionable product.  Simmons markets the "RushCard" a Visa-branded prepaid debit product marketed primarily to the black community.  The card provides a payment device for an ersatz deposit account, which allows cardholders to make transactions when cash is not accepted.  Remember that there is no extension of credit to the consumer on the RushCard.  Instead, like any prepaid debit product, the RushCard consumer is actually lending money to Bancorp Bank, the card issuer.  And, as we'll see, the consumer is actually paying money to make an interest-free loan to the Bancorp Bank.  

Simmon's claim is that the RushCard provides important access to financial services for the unbanked:  it's helps consumers avoid check cashing and bank account fees, has greater security than cash, is convenient, and it's "the prepaid card that provides respect." 

What's respect worth?  Well, take a look at the fee schedule below and decide for yourself.  

There are a lot of potential fees on the RushCard, but the one that gets me is the $1/transaction "convenience fee." Is it respect to charge consumers a dollar every time they access they own non-interest-bearing funds?  

This "convenience fee" is on top of interchange and on top of an initial fee.  It bears no relation to any cost.  It's simply rent-seeking pure and simple.  To illustrate, Assuming Visa's default debit interchange rate, Bancorp Bank makes $1.63 in fees on a $20 RushCard purchase--$1 directly from the consumer plus and $.63 from the merchant in interchange.  That sort of fee is comparable to or higher than check-cashing fees for a $20 check.  

Now, to be fair to the RushCard, its fees are hardly exorbitant by the standards of the prepaid debit card market.  (Compare the fee schedule for Green Dot, one of the leading prepaid debit brands.)  But that's not saying much. Prepaid debit, is a product aimed at unbanked low-to-moderate income consumers, and like many LTMI financial products, the pricing is awfully high for the service provided.  While Russell Simmons may want to believe that he's doing God's work, he's also hawking a product that hardly represents the best practices of serving LTMI communities.  

FeePay Monthly ProgramPay As You Go ProgramDescription
Activation Fee$3.00$19.95One time Card activation / fulfillment fee, assessed at the time of initial load and deducted from Card balance.
Monthly Fee$9.95*N/AMonthly fee assessed on the first day of every month.
Add Money FeeFREEFREEThird party load partners may charge a fee for use of their services.
ATM Balance Inquiry Fee$0.50$0.50Assessed each time Card balance is requested at an ATM within the United States.
International ATM Balance Inquiry Fee$1.00$1.00Assessed each time Card balance is requested at an ATM outside of the United States.
ATM Withdrawal Fee(2) FREE each calendar month -
$2.50 for each ATM withdrawal after first (2)
$1.95Assessed each time Card is used to obtain cash from an ATM located within the United States.
International ATM Withdrawal Fee$2.50$1.95Assessed each time Card is used to obtain cash from an ATM located outside of the United States.
Convenience FeeSignature - FREE
PIN POS - $1.00
$1.00, capped at ten ($10.00) per calendar monthAssessed per transaction. For the Pay As You Go schedule, Convenience Fees charged above the ten dollar ($10.00) amount will be refunded to your Card balance the following calendar month.
International Convenience FeeSignature - FREE
PIN POS - $1.00
$2.00Assessed for each Signature and PIN transaction each time Card is used outside of the United States.
Bill Pay Enrollment Fee$2.00$2.00Assessed at time of enrollment into the online bill payment program, and deducted from the Card balance.
Bill Payment Fee$1.00$1.00Assessed each time an online bill payment transaction is made, and will be deducted from the Card balance.
Card To Card Transfer FeePersonal Card-to-Card: FREE
Cardholder-to-Cardholder: $2.95
Personal Card-to-Card: FREE
Cardholder-to-Cardholder: $2.95
Assessed each time you initiate a transfer of your funds from one Card Account to another Card Account.
Replacement Card Fee$9.95$9.95Assessed per request to replace a lost or stolen Card.
Expedited Replacement Card Fee$30.00$30.00Assessed per request to replace a lost or stolen Card in an expedited time frame.
Express Check Fee$30.00$30.00Assessed per request. You may request a check for the balance of your Card if you have reported your Card as lost or stolen and do not have access to your Card balance.
Online Statement FeeFREEFREEYou will not be charged to view your statement online at www.rushcard.com.
Paper Statement Fee$1.00$1.00Assessed each time a paper statement is mailed. Statements are mailed only upon request.
Currency Conversion FeeSee DescriptionSee DescriptionYou may be charged a fee of up to 2.00% of the converted U.S. dollar amount of any transaction made in a currency other than U.S. dollars.
Maintenance Fee*N/A$1.95Fee assessed if no Card Transactions or loads onto a Card have occurred for a period of ninety (90) consecutive days. Fee is assessed each month and will be deducted from your Card balance until you next use your Card.

Comments

I do agree, that Russell simonns do have a bit of a questionable judgment but on the other hand let's not take away that regulation of credit card fees and bait and switch tactics by merchants to discourage their use or do so to maximize profit against their contractual obligations and to do tax evasion is the real goal. A black chamber of commerce spokesman agreed about that.

Many consumers including me initially have always remain confused about debit and people getting cash back at he supermarket especially when you are younger. It is true that debit is much different then credit, even truer when using a pin number rather than credit. Debit does not build credit scores.

Interestingly "secured credit cards" can be also be discriminated against the merchant, subject to interchange regulations, and face a surcharge. While russell may have questionable views, there is a larger argument at stake.

Little has been mentioned about the other part of the durbin bill that is the discounts without penalty of offering cash, different networks, check, and debit discounts, currently regulations allow discounts if the deal is clearly visible to the customers. This is an example of retailers wanting to cherry pick to get maximum benefit without costs, they know that sometimes they may want credit cards but want cash only sometimes. The retailers don't' say this but if they wanted easier discounts they could simply offer a sign saying 3% cash off, their excuse is that it is difficult but they only say that because they don't have many other excuses, many gas stations already charge a fee, so do state and local governments.

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