Hip-hop mogul and entrepreneur Russell Simmons took to Capitol Hill last month in an effort to help low-income consumers. Simmons successfully lobbied for changes in the financial services reform bill--changes that would exempt prepaid debit cards like his RushCard from fee regulation by the Federal Reserve.Sound complicated? It is. Robert Schmidt and Patrick O'Connor over at Bloomberg Businessweek do a nice job of summing up the bill, but the shorthand version is this:
When a consumer pays by debit card, the retailer pays a small "interchange fee" to the consumer's bank. The retailer then shoulders that cost, which retailers estimate to be almost $20 billion annually.
Illinois Senator Richard Durbin has been pushing to reduce these interchange fees for years, and he recently won an amendment to cap the fees and let the Federal Reserve, rather than the debit card companies, set the fee rates. This all boils down to more profit for retailers and less for Simmons' RushCard. (Sold by Cincinnati-based UniRush, this card is just a prepaid Visa.)
Now for Simmons' involvement. The mogul argued, both on Capitol Hill and in a Huffington Post blog, that low-income people rely on prepaid debit cards, as they cannot afford checking accounts and are often denied for credit cards. Allowing the feds to set the fees, Simmons said, would force him to charge higher fees to already-financially vulnerable RushCard holders. Simmons said in his blog he doesn't "give a damn about the profits of big banks" and that he "has no hidden agenda." He just wants to protect the poor.
I wholeheartedly applaud Simmons for using his fame and notoriety to give voice to low-income groups and minorities (who too often fall into the former group). Any time a Bentley-driving celebrity comes out in favor of the little guy, I think we're getting somewhere.
But a deeper dig into this issue reveals Simmons' efforts would be better spent elsewhere. First, as the Washington Post's T.W. Farnam points out, the RushCard is not free. Cardholders pay a $3 activation fee, a $9.95 per month "membership" fee, $2.50 for an ATM withdrawal, $1 per debit card transaction and 50 cents to check their balance at an ATM.
Looking at the costs of the prepaid card, one begins to wonder if this card is really the best option for non-checking/credit account holders. And the resounding answer in my mind is "no." Prepaid cards, like payday loans, can be helpful at times, but as a lifestyle they delay the inevitable. Simmons' efforts, it seems, would be better spent helping low-income consumers get to a place where they could afford a checking account and could avoid monthly membership fees. Surely he has some real estate he's not using. I say sell the yacht and start a financial literacy program.
I also can't ignore the contrast between what Simmons says he stands for and what he does. I know, I know, a business has to make money, but are $62 Phat Farm jeans and $40 T-shirts really helping the little guy? Simmons participates in the "marketing of hip-hop"--buy this to attain this hip-hop star lifestyle filled with gorgeous women, money and cars (for further proof, watch Simmons and his ex-wife Kimora in the reality show, Kimora: Life in the Fab Lane)--which can only land the poor in deeper debt and further from financial stability.
I believe that Simmons has good intentions. I don't think his trip to Capitol Hill was a publicity stunt in the slightest. However, the hip-hop mogul would do well to look to the root of the problem his RushCard claims to address: A consumer culture based on the attainment of a star-studded lifestyle much like his own and a lack of financial skills to boot. Prepaid debit, fees or no fees, is merely a BandAid.
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Russell Simmons is indeed abusing his star power to take advantage of the under-served and line his own pockets at their detriments.
ReplyDeletePrepaid card accounts are indeed a good solution: they do not require any level credit score and are available to people who would be refused a checking accounts because of a history of overdrawn checks.
Some prepaid cards are just as powerful if not more than a checking account: they allow to send paper checks (for example to pay rent), and to directly add minutes to a prepaid mobile phone.
The RushCard does not do any of that, and charges more fees than cards which do have those add-on services.
Less services, more fees: The RushCard is a rip-off.
People should do their homework of looking for the best deal rather than trusting the star power of a music mogul.