[Editor’s Note: In March 2013, after we published this article, American Express struck a deal with Wells Fargo allowing FDIC "pass-through" insurance to cover Bluebird prepaid cards. Customer funds are now protected up to $250,000.]
Here's something else that's got the potential to undermine our financial future...
It's about those prepaid cards, and the games that are being played with them that you may not know about.
Prepaid cards have lots of benefits, especially for the "unbanked."
These are the people who more or less may live paycheck to paycheck, or don't have jobs but need a "card" because both credit and debit cards are how we pay for most things these days.
A lot of people are rebelling, and rightfully so, against the higher and higher fees that banks are charging on checking accounts (and for all their other "services") and are turning to prepaid cards as an alternative means of paying for goods and services.
Now, American Express (NYSE: AXP) is partnering with Wal-Mart (NYSE: WMT) to offer Bluebird cards. The cards are being pushed through Wal-Mart stores and are ostensibly backed by American Express.
American Express? As if it's a bank. Wait a minute...
It is a bank.
That's because back on November 10, 2008, at the height of the credit crisis, American Express had to become a bank (actually a bank holding company) so it could take money from the Federal Reserve to stay alive.
You forgot that, didn't you?
And Wal-Mart, well, they have been trying to become a bank in several end-around ways.
Now, they've come together. The "bank" status of American Express and its 100-year history of issuing Travelers Checks (the first prepaid cards, really) and the marketing power and reach of Wal-Mart, into the pockets of the less than wealthy and notably underbanked, has yielded a Bluebird capable of flying in the face of safe banking.
There are lots of problems with the prepaid card game. My biggest problem is that there are plenty of fees attached to these types of cards. They're NOT free. A lot of the time folks aren't even aware of the fees they're paying.
They just know that bank fees are higher, or at least they think they are higher, which most of the time, they are.
What You Need to Know About Bluebird
Then along comes Bluebird with its no-fee prepaid cards. Sounds good, right? It is for now.
But, mark my words; there will be fees down the road.
So, why are American Express and Wal-Mart partnering to offer free prepaid cards that they hope will eventually become a lot of folks' new checking account-type service?
Because they get paid "interchange" fees every time you swipe one of their Bluebirds.
There was a law just passed that broke interchange fees (the fees that merchants get charged when you use a card at their establishments) into different categories, with different costs per swipe, depending on the type of card (credit, prepaid, debit) you use; and guess what end of the interchange fee structure the no-fee cards will feed off of?
Of course, the Bluebird card will garner the highest interchange fee. That's where they (American Express and Wal-Mart) will initially make their money. That is, until millions of customers and consumers start flying high with their Bluebird cards, then they'll inch into more fees.
Oh, don't worry that Wal-Mart is paying the higher interchange fee (if you caught that). Not only will they eat off American Express' plate of those fees, they will pass along the higher interchange fees to their loyal customers, the ones who go there for low prices all the time.
The whole argument for lowering the interchange bank fee monopoly in the first place was because higher fees were being passed along to consumers by the merchants who were being charged by the processors and banks.
See how some things come full circle? Or as Dave Mason sang, "It's Like You Never Left."
But, that's not my problem with these prepaid and new-fangled bank-alternative cards.
The problem is that the money you use to pay for your card, which goes to the card company, isn't insured. There is no FDIC insurance on the money you give card companies, on the money sitting there that you haven't spent by swiping your card yet.
They could go under. American Express was closer than you think. And you don't think it could happen again?
What will happen if that happens? Will the government bail out all the prepaid card companies, most of whom aren't banks? Will the Federal Reserve bail them out, like it did American Express?
Where are we going with this?
It's frightening because people don't know. There are no answers right now.
There is only one thing for sure, where we're going is ineluctably towards another cliff.
Why? Think about it. Comment here about what you like or don't like about prepaid cards and where you think this non-bank, uninsured depository scheming track is taking us. I want to hear from you.
>>Don't miss Is Wal-Mart's Bluebird Brilliant or an Invitation to the Slippery Slope?
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.