Of a Different Feather

Is Bluebird now a checking account in a prepaid card’s clothing?

By Cary Whaley

In the March issue of ICBA Independent Banker, when I wrote about my “test drive” of the Bluebird prepaid card, Wal-Mart’s retail payments venture with American Express, I portrayed an awkward, limited product. I outlined why the Bluebird card—which included the ability to deposit funds, access surcharge-free ATMs and receive certain services and benefits like bill payment and roadside assistance—was likely to be compelling for consumers. I also warned of disintermediation for community banks lacking their own prepaid option.

However, in payments, things rapidly evolve. Since the article was published, Wal-Mart has announced a number of changes to Bluebird that are designed not only to make the prepaid card more versatile, but to compete head-on with banks by imitating much of the functionality of a checking account. Under the retooled Bluebird offering:

– Accounts are now FDIC-insured, removing one of the biggest Bluebird drawbacks (and community bankers’ best salvo against this attack on their business model). As a result, consumers can now deposit government benefits (such as Social Security, military and tax refund payments) onto the card.

– The annual card load limit has been raised to $100,000.

– Consumers can also now write pre-authorized checks against Bluebird funds (their answer to the overdraft problem). All Bluebird cardholders can get one free checkbook until August; after that, a checkbook is free for direct deposit cardholders and $26 for non-direct deposit cardholders.

Even Bluebird’s fee structure has been tweaked. Card holders can now add cash to the card for free at Wal-Mart (previously it cost $1), and can avoid ATM surcharges at MoneyPass locations if they reload money on the card using direct deposit transactions.

Other concerns

Unlike other prepaid offerings, Bluebird leverages Wal-Mart’s immense scale and market reach to create a checking account alternative that deepens their customer relationships. Bluebird scales over the statutory wall that is supposed to separate banking from commerce as customers can open accounts and deposit funds at Wal-Mart locations. (As you remember, ICBA and its members pulled out all the stops seven years ago to prevent Wal-Mart and other big-box retailers from purchasing industrial loan companies.)

Does the Bluebird card now position Wal-Mart not only as the world’s largest retailer but also as a bank with thousands of branches? How do consumers find clarity and certainty when nonbanks can offer financial services without the regulatory checks and balances to which banks are subjected?

ICBA believes these questions must be answered. The association has written to the heads of the CFPB, the FDIC and the Comptroller of the Currency to express our legal and regulatory concerns about the Bluebird account.

What’s next?

A common experience for consumers, including applicable consumer protections, prevents customer confusion. Therefore, ICBA has requested that the agencies ensure that Bluebird accounts are subject to the same legal and regulatory framework and oversight afforded to traditional checking accounts offered by banks, including those governing FDIC coverage and bank deposit taking.

In its letter, ICBA points out that Bluebird accounts are custodial accounts at FDIC-insured banks. Their funds are co-mingled with other funds held at the custodial bank, which ICBA argues “will create consumer confusion … for the purpose of determining per-deposit or insurance coverage.” A situation that will be exacerbated, ICBA writes, “because of the lag in insurance coverage between the time funds are deposited and the time they are placed in a custodial account at an FDIC-insured bank.”

There also is a question of whether the custodial banks and Wal-Mart are violating state banking and branching laws. If Wal-Mart is acting as a branch of the custodial bank when a Bluebird account is opened or a customer adds value to the account at the store, that must be investigated and resolved, ICBA maintains.

“Bluebird is helping customers streamline everyday money management without the frustration of navigating complicated do’s and don’ts just to avoid fees,” Wal-Mart wrote in its official announcement of the new features.

But the important question remains: Is circumventing a system of checks and balances established to protect consumers and insulate our system against undue risk really the future of banking we want to promote?

Of course, the answer is no.

Cary Whaley is vice president, regulatory policy for the ICBA.