Buyers Beware of Celebrity Endorsed Financial Products

Writing in Slate, Annie Lowrey describes what can only be described as a troubling trend—the appearance of celebrity endorsed prepaid debit cards with really crappy fees. The advent of the Kardashian Kard is being marketed to teenage girls and is just the latest entrant into one of the fastest growing segments of the consumer financial services marketplace.

Not that I am completely ignorant of current pop culture, but I don’t really know who the Kardashians are. I reckon they are not Rhodes scholars but rather reality show “stars” confused by the distinction between fame and infamy. Maybe I’m wrong on this but I don’t think we should be turning to them for financial advice.

I am a bit more hip to the music scene, and am more familiar with the work of Russell Simmons. He also has a card that he’s been peddling for a few years now. It is called the “Rush” card, and although I have not looked into all the details of its account features, a colleague who I respect has said it has so many fees associated with it that essentially you get charged for looking at it. Even though that may be hyperbole, it seems that there should be a way to offer a better deal for consumers.

Don’t get me wrong. I think the prepaid card terrain can play an important role. These cards can provide a means to manage money, which is particularly valuable for people without access to basic bank accounts. There has actually been plenty of innovation with these cards, which now can be supported with a number of notable features. You can load-up and store money, pay for expenses without carrying cash, and save up money over time. Depending on who issues them, some cards can even be backed by FDIC insurance. We are already seeing these cards be incorporated into various public sector program, such as food stamps, Social Security, and the delivery of tax refunds. With the development of card technology and getter acceptance in the marketplace, I predict we will soon see a collapsing of any distinction between “cards” and “accounts.”

However, that is not what the Kardashians appear to be offering. As Lowery describes it, their product is pretty brutal on a consumer looking for a high-quality and low-cost product:

“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.”

I guess if one was trying to make a case for this product in light of all these fees it would be that the customer is purchasing some sense of cache that comes with owning this card. Maybe there is a sense of status or pride (or who knows what feelings translate into what economists call utility) when this card is used to complete a financial transaction. Maybe there’s a cool factor that kicks in when you show it to your friends on the dance floor. Perhaps I am stretching here but I’m trying to justify these products to offset their high cost. The problem is that most consumers don’t know their true cost ahead of time. When there is poor transparency, fees can quickly add up and make it a poor value proposition for the consumer.

And let’s be clear, the reason that providers are flooding into this market is not because of their drive to serve the underserved, but because it is lucrative and has largely been unregulated. In contrast, recent regulatory changes have taken away other revenue steams, namely the fees associated with regular debit card use and the ability to market credit cards. This means that the Rush card and the Kardashian Kard will be joined by others. I fully expect the new Consumer Financial Protection Bureau to weigh in on these developments once they get staffed up. Given their mandate to ensure fairness and transparency in the financial services marketplace, we should expect greater scrutiny of prepaid debit card products and a new set of standards for their terms and marketing. Until then, buyers beware.