When it comes to financial advice, there are a few timeless standbys. Use credit sparingly. Pay your bills on time. Save as much as you can. And do not buy a complicated financial product hawked by a B-list celebrity with a sex tape.
But try telling that to the teen girls clamoring for the new Kardashian Kard, a prepaid debit card sponsored by MasterCard. Emblazoned with an image of Kim, Khloé, and Kourtney, the card—ahem, kard—got its kick-off last week with a paparazzi-mobbed red-carpet party sponsored by “the first Mediterranean luxury vodka,” among others. “We are excited,” the Kardashians said in a statement. “Now our fans will be able to take us with them everywhere.” The card is being marketed to teenage girls, who (so the Kardashians and their marketing consultants hope) will have their parents or guardians load it up with their allowance and use it like a credit card.
One thing is for sure: The Kardashians are getting in, again, on a trend. Prepaid debit is one of the fastest-growing segments of the consumer-finance industry. The Mercator Advisory Group, a consulting firm, estimates that the total market will double in size in the next three years, with customers loading a whopping $672 billion onto prepaid cards by 2013. Users loaded $330 billion onto the cards in 2009. Much of that growth will come from reloadable, use-anywhere cards like the Kardashian Kard.
But teenagers aren’t the only, or even the primary, target audience. Prepaid debit is an easy way to transfer funds to people without bank accounts. Dozens of state governments use them to issue unemployment benefits, and the federal government uses them to grant Social Security payments. (Those segments of the market grew 292 percent and 197 percent, respectively, in 2009 alone, Mercator says.) Prepaid debit is also popular among people with nonexistent or bad credit histories, who have trouble getting credit cards, and with illegal immigrants.
Of course there is another reason, besides their eagerness to serve underserved markets, for the enthusiasm of banks and financial firms: Regulatory changes have reduced the industry’s income from fees on regular debit cards and have made it harder to sell credit cards to teenagers. Since July 1, debit-card issuers have not been able to let customers overdraw their accounts and then to charge them—often $35 per overdraft—without the customer’s permission. (Only 22 percent of debit-card users said they want the bank to let them overdraw.) That will cost banks something like $30 billion a year.
The Credit Card Accountability, Responsibility, and Disclosure Act, passed in 2009, came into full effect this year. Now, people under the age of 21 need a cosigner or evidence they have enough income to make minimum monthly payments to get a credit card. And banks can no longer set up big booths on campuses and hand out tchotchkes to college kids, getting them to sign up for high-interest-rate products. Moreover, the Dodd-Frank financial-reform bill, signed into law this year, also limits the ability of banks to charge some fees.
But for the industry, the most worrisome trend may be that young Americans are turning away from credit products, full stop. “There are a lot of under-35-year-olds who have never had a credit card,” says Gail Hillebrand of Consumers Union. Prepaid debit cards are a way for the financial industry “to tap into the young consumer market.”
Enter the Kardashian Kard, which not only appeals to young consumers but also has more fees than the Kardashians have reality shows. First there are the upfront costs. For a six-month card customers pay $59.95, or $99.95 for a 12-month card. (The median fee for similar, non-Kardashian-festooned products is $10.) After those six or 12 months, there is the $7.95 monthly fee to keep using it. Users pay a $1.50 fee to withdraw cash at an ATM and a $1 fee to check their balance. They pay $1.50 to speak with a customer service representative. If they lose their card, they have to pay $9.95 to replace it. If they want to cancel their card, they have to pay $6.
So let’s pretend that our teenage Kardashian fan somehow harasses her dad into getting her a six-month Kardashian Kard for her $200-a-month allowance. That would be $1,200 for the life of the card. But she checks her balance on average once a month, withdraws cash at an ATM a couple of times, and calls customer service when the card cracks, requiring replacement. At the end of six months, for $1,200 in spending, she would have paid $80.40 in fees—about 6.7 percent of her “balance.” If the teenager had a checking account with a debit card, the fees would probably be somewhere between zero and $36.
There’s another reason consumer advocates don’t like these kinds of cards: Prepaid debit does not come with the protections or the financial-education benefits of plain-vanilla banking products. A report updated last month from Consumers Union, the Consumer Federation of America, and the National Consumer Law Center warned that consumers “face dangers and traps with prepaid cards, which are becoming the foundation of a second-tier banking system that shadows the traditional banking system.” For instance, if someone steals a card, it is not clear that the original user will get all his or her money back.
Nevertheless, banks and financial companies are preparing to make the hard sell for prepaid debit. “We think that banks are going to start offering these as substitute bank accounts, not just for teenagers or the unbanked,” Ben Jackson of Mercator predicts. “Regular checking accounts are becoming a lot less profitable [for banks, due to the Dodd-Frank law], and to a consumer, these cards can function almost exactly like a checkless checking account.”
So maybe one day we all might be carrying the Kardashian Kard around with us, whether we like it or not. But for now, there’s no real reason to keep up with them.