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Barnes & Noble Inc
Western Union Co/The
MoneyGram International Inc
“I love you!” a woman yells as personal finance guru Suze Orman enters the drab conference room at a Barnes & Noble (BKS) in suburban New Jersey. Fans cheer and clap while a man in the front row tears up from excitement. Orman is here to preach the tough-love brand of financial advice that she’s been peddling for more than a decade through nine bestselling books, a highly rated CNBC show, and regular appearances on the old Oprah Winfrey Show. “You have got to be the masters of your own financial future,” she tells the 200-strong crowd. While the event coincides with a new paperback edition of her 10th book, The Money Class, that’s not the main focus of her talk. “You need more than books,” she says. “Now you need the tools.”
Orman has a particular tool in mind. Just a few days earlier she introduced her first financial product: a prepaid debit card emblazoned with her name. She sees her Approved Card as an alternative way for people who are fed up with—or don’t have—traditional checking accounts and credit cards to manage their cash. And if the most ambitious part of her plan succeeds, the card may eventually help users improve their credit scores.
Orman’s Approved Card, issued by Wilmington (Del.)-based Bancorp Bank (TBBK), is in part designed to play the role of pestering mom. The basics are simple: People use electronic transfers or cash to load money onto their cards, then use them like regular debit cards, buying groceries or shopping online. The Orman touch comes in such features as automatic text message alerts sent to mobile phones that note the balance remaining on the card after each purchase. The card’s website has Orman issuing such sharply worded reminders as, “Before you make a purchase, you’d better be able to afford it—do you hear me?!”
Prepaid cards are the fastest-growing payment method, Federal Reserve data show. In 2010 people used them for $65 billion in transactions, compared with $48 billion in 2009, the industry newsletter Nilson Report says. Part of the cards’ appeal is that you can’t get into debt with them. “I think it’s a good idea to have a prepaid card rather than going out willy-nilly with a credit card,” says Glinda Kidd at the book signing.
Still, prepaid cards often come loaded with fees—and Orman’s is no exception. It has a standard $3 monthly charge. While there’s no cost to reload the card with direct deposits or automatic transfers from a checking account, people must pay up to $4.95 to put cash on the card at Western Union (WU) or MoneyGram (MGI) locations. And if they load with cash rather than electronically, all ATM withdrawals cost $2. One free call to a customer service rep is included each month; extra calls are $2 each.
“What people don’t understand is the cost to do business,” says Orman in an interview. “If I could have given this to you for free, I would have.” Orman, who says she invested $1 million in the venture, declines to discuss how much money she might make from it. And she vows to train customers to keep their costs down. In videos on the card’s website, she explains the fees, warning that people who load their cards electronically can get cash from one of the 35,000 ATMs in the Allpoint network for free but will incur a $2 charge for using other ATMs—plus whatever fee the ATM operator imposes. “Why would you want to waste money like that?” she says in the video. “Don’t be lazy, and go to an Allpoint ATM.”
Orman says if she finds people are incurring fees to put cash on the card, only to spend another $2 to get cash at an ATM, she will ask them to turn in their plastic. If you’re going to squander money that way, “just keep it in cash! You don’t need the damn card,” she tells the audience at the book signing.
Michael Collins, an assistant professor at the University of Wisconsin who studies the financial decision-making of low-income families, says people will eventually figure out the costs of any product. “The question is how long will it take” and how much in fees they will have racked up by then, he says. Collins adds that if Orman’s messages help people control their spending impulses, the card could be beneficial: “Anything that gets people to think harder about their financial security and take some responsibility is a good thing.”
Some personal finance bloggers have complained about the fees and charged that Orman is using her influence to bilk her fans. On Twitter, the Blog Finanza website said: “You are taking your authority figure to make a $$ from your audience. #DENIED”—echoing a catchphrase from Orman’s TV show. Others, such as MSNBC.com consumer finance columnist Herb Weisbaum, said many people would be better served by building their credit immediately with a secured credit card.
Orman dismisses the criticisms, saying the card reflects her understanding of people’s financial habits and needs. “I am the personal financial expert of the world,” she says. “I know what I am talking about.” Publicly, Orman lashed out on Twitter against the naysayers, calling them “small thinkers,” “idiots,” and “Suze haters.” After New York Times personal finance columnist Ron Lieber and others protested the harsh words, she issued a blanket apology: “For anyone I called an idiot, I too am sorry.”
Orman says some of her critics want to derail what she calls the most important part of the enterprise, an attempt to change how FICO credit scores are calculated. Currently, credit scores are based mainly on debts like credit cards, mortgages, and car loans. That makes it hard for people who don’t borrow money to establish a credit history. Orman has persuaded the credit bureau TransUnion to use data from her prepaid card to study whether debit purchases can be an indicator of creditworthiness. Since lenders, employers, and even landlords often check FICO scores, being able to establish a credit history with a debit card could be a boon for people who don’t have loans or credit cards.
That prospect may be years away. The two other large credit bureaus, Equifax (EFX) and Experian (EXPN), aren’t on board. The study will take 18 to 24 months—if there are enough data to make the analysis robust. “If the card doesn’t scale or the number of transactions don’t scale, it’s not going to do anything,” says Madeline K. Aufseeser, a senior analyst at Aite Group, which advises prepaid-card issuers. Even so, the idea of bucking the credit-card and credit-scoring industries clearly appeals to Orman’s fans. After she explains the FICO effort at the book signing, a man shouts out, “How can we help you?” Orman’s answer: Get my card.
The bottom line: While Orman’s debit card is meant to help people manage their money wisely, it puts her in a position of hawking a financial product to fans.