A St. Paul-based community bank finds itself snared in a controversy around the newest money-making project of Kim, Khloe and Kourtney Kardashian, reality series stars of E! cable network’s “Keeping Up With the Kardashians.”
The Kardashian Kard, a prepaid MasterCard created by a California company and issued by University Bank in St. Paul, has attracted harsh criticism in recent days for its high fees and confusing terms, as well as other issues.
Sunrise, which describes itself as a “leader in improving our urban community,” touts its community development work and status as a federally certified Community Development Financial Institution.
But it now finds itself tarred with some of the negative attention surrounding the conspicuously consuming Kardashians’ latest deal.
Hot brand, hot controversy
It all started two weeks ago with the launch of “The Kard,” carrying the hot brand of the Kardashian sisters. Promotions say it “allows cardholders to make purchases, obtain money at ATMs, send and receive money instantly from a mobile phone [and] online,” all without “credit checks, or ChexSystems or employment verification.”
The card quickly netted a blistering critique from Consumers Union policy associate Suzanne Martindale, who observed, “[T]here’s nothing glamorous about a prepaid card that comes with a bunch of hidden fees and other gotchas.”
CU cited three beefs with the card:
• First, there are several fees, including an upfront prepay of six or 12 months. That means a startup cost of $59.95 or $99.95 just to activate the card, and there’s an ongoing $7.95 monthly rate after that. Then, add on ATM withdrawal fees and cancellation fees that are not immediately apparent in the marketing of the card.
“Don’t try keeping up with the Kardashians by falling for this celebrity-hyped prepaid card. There are more affordable and safer options to managing your money and paying with plastic,” Martindale concluded.
“Fees vary widely. There’s no norms,” she said in a brief interview, advising consumers to think about how they’ll use a card for groceries, ATM withdrawals or other purchases. “Find the fee schedule. You have to do your homework.”
• Her second critique: Customer deposits for prepaid cards are managed in a pooled fund, not separate accounts, so depending on the accounting treatment by the bank, they may not be fully insured by the FDIC if a total pool exceeds the $250,000 insurance limit.
• Third, CU’s Martindale said that prepaid cards are not covered by the same consumer protections as regular credit or debit cards, so they lack the same consumer protections limiting cardholder liability if a card is lost or stolen.
(Sunrise Bank offers a counter to the latter two criticisms. More about that later.)
The CU piece got picked up by the wire services, spawning a mini-eruption of commentary, mostly negative, some of it splattering University Bank.
Other critics pile on
Another site, CreditCards.com, weighed in as well.
“It’s one thing to be hip and cool, but don’t let the cool thing of the moment lead you to make bad money decisions” was how writer Connie Prater summed up the CU critique.
She also highlighted — suprise, surprise — ambiguous language in the cardholder agreement and ran the entire document through a “readability analyzer,” which rated the agreement college sophomore level reading material — “way above the understanding level of average teens or even their parents.”
Prater also identified University Bank as the card-issuing bank and quoted a spokesperson for Sunrise, Jeannie Bauer, who was quoted in an email: “This is not the least-expensive option in the market; we acknowledge that. But the program manager and the Kardashians felt that their target market, young professionals, would be accepting of these fees.”
Slate.com writer Annie Lowrey advised readers: “And do not buy a complicated financial product hawked by a B-list celebrity with a sex tape.” She also charged that 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.”
Lowrey also says the rise of prepaid cards is a way for banks to offset the loss of fee income from tighter regulations coming out of the Dodd-Frank financial reform bill passed last year.
Bill Hardekopf, CEO of LowCards.com, blogging on Forbes Magazine’s website, declared the card “a ripoff” and said the free-spending Kardashian sisters should not be held up as personal finance role models for young people: “They should not be the ones to guide our kids into the world of credit cards. That should be our responsibility as parents.”
Not everyone was critical, however.
American Banker explained “the business model behind the card is an apparent attempt to lock consumers in over time,” to counter their tendency to treat prepaid cards as disposable, saying their approach is to “make the card too expensive to put down.”
The article then quoted Aaron McPherson, an electronic payments industry analyst at IDC Financial Insights in Framingham, Mass. who called the upfront fees “a good idea … But I do think that it needs to have more stuff associated with it,” he added. “There should be access to some special website that you can download exclusive wall papers, videos. It can’t just be a payment device with a picture. It has to be an experience. It has to link you to experiences.”
Reaction surprises Sunrise CEO
When asked for his reaction to the bank’s name being associated with the buzzsaw of criticism, Sunrise CEO Reiling expressed surprise at “the viral nature of the media” that sprang up around the issue and what he characterized as “misinformation” that has surrounded the program.
He said criticism that the card is targeted at the celebrities’ teen fan base is inaccurate, noting it’s limited to consumers 18 and older. “Believe or not, the Kardashian demographic is balanced across all segments: old, young, male, female,” he added.
He also disputed the Consumer Union critique that prepaid cards are not subject to the same protections as regular credit or debit cards.
“I’m under the impression there is more protection” than other forms of prepaid cards, he said, adding that the card has “the same protection (as) checking accounts.” He said the card is covered by the Federal Reserve Bank’s Regulation E, which covers certain electronic transfer of funds and limits a cardholder’s liability to $50 if a card is lost or stolen and the cardholder notifies the bank within two days. The consumer’s liability can increase to $500 if that two-day notification requirement is not met, however.
(A quick read of Reg E seemed to substantiate Reiling’s claim that the cards are covered. The Federal Reserve Bank website also indicated that recent credit card reform legislation would lead to additional regulation of prepaid cards in the future.)
Reiling also said that despite the pooled fund status, cardholder accounts would be individually identified and insured up to the full FDIC limit.
The prepaid market ‘hasn’t been that big a business for us in the past,” Reiling said. “We’re starting to emerge.”
According to a CU survey of 19 major prepaid cards, the largest bank issuers are MetaBank, a Storm Lake, Iowa-based bank with $834 million in assets, and Bancorp Bank headquartered in Wilmington, Delaware with assets of $2.7 billion. Sunrise Banks holds $598.5 million in assets.
Sunrise currently has about 190,000 active prepaid cards out in the market, Reiling said. “Nobody really makes a lot of money on one [card],” he said, with fees split among banks, marketers, processing companies and the entity lending its brand to the card, in this case, the Kardashians. “It’s a volume business to make it financially sustainable.”
In explaining the Kardashian Kard role in its business mix, Reiling said it supports the bank’s mission to “provide financial service for the unbanked. [To do that, though, we] have to take on some traditional prepaids. We need a blend [of products].”
Part of the bank’s business strategy, he said, is to look for underserved markets and “provide easier, less costly access,” to financial services, including electronic payments. He calls prepaid cards a “substitute for cash with additional safety provisions.”
Prepaid cards, he said, are “a responsible product” that limits consumer purchases to funds that are on hand and without overdraft fees. Reiling would “like to see cost come down as we get more competition.” He also said that “free checking is going away,” and the cost of prepaid cards is in line with other banking services as banks reinstate a variety of fees.
Reiling, admitting he was surprised by the negative publicity attached to the Kardashian Kard, reflected on the experience, given the bank’s brand image of providing financial services for underserved populations — not likely Kardashian Kard targets.
“We had a long conversation … ‘Is this right? Not right? Ethical? Not ethical?’ The fact is much of pop culture … reality TV seems to be pop culture of the day. Is that right or wrong? I don’t know.”