NEW YORK -
JPMorgan Chase & Co plans to move its least profitable checking customers into new accounts that rely more heavily on debit cards, in an effort to boost earnings in a business that has been clobbered by new regulations.
The accounts are known as "prepaid debit cards," and are like a checking account, except that customers cannot write checks and instead spend via a debit card.
A loophole in 2010's Dodd-Frank financial reform law allows banks to charge merchants relatively high fees for processing payments made with this type of debit card.
Chase will market the cards mainly to people who frequently overdraw their accounts, keep low balances, or do not qualify for a checking account at all.
These customers have become a millstone for banks across the country after new U.S. regulations limited overdraft fees that banks can charge. A prepaid debit card cannot usually be overdrawn.
Many banks are going the same route as JPMorgan Chase and moving unprofitable customers into prepaid debit cards. The product generates fees - it will cost consumers $4.95 a month, for example - and also cuts down on the cost of maintaining the account, said Todd Maclin, who heads Chase's consumer and business banking unit.
"When we get out of the overdraft business, we also get out of the check business, which means we get out of the paper business, which means we also get out of a lot of processing, which means we save a lot of money," Maclin said.
Between new regulations on fees and low returns on customer deposits as interest rates have dropped, JPMorgan Chase estimates that about 10 percent of accounts do not generate enough revenue to cover their incremental costs, such as check processing and deposit insurance.
The bank aims to spend less on those customers while spending more to attract high net-worth individuals who will more than pay their way with purchases of investment and savings products.
BREAKTHROUGH OR FLOP
JPMorgan Chase announced its prepaid debit card plans at an investor conference on Tuesday. The bank hopes that the prepaid debit card will help it avoid the negative publicity that overdraft fees can garner. Many consumer advocates view those fees as a stealth tax on the poor.
Prepaid debit cards can carry high fees as well, but JPMorgan Chase says its card is among the cheapest available for the average consumer.
JPMorgan Chief Executive Jamie Dimon said in his annual letter to shareholders in April that the product "could be a breakthrough product for consumers in terms of pricing transparency, convenience and simplicity."
"The management team doesn't want me to get too excited in case it doesn't work," he added. He did not mention the prepaid debit card by name in the letter, but a person familiar with the matter confirmed he was referring to the product.
Chase will sell the cards in its 5,500 branches in 23 states. It is not adding extra fees for deposits or withdrawals at its ATMs or branches. The cards have been sold in a pilot program in two states for a few weeks.
Prepaid debit cards give banks a way around rules linked to a provision of Dodd-Frank known as the Durbin amendment, which limit fees charged to merchants for processing conventional debit cards to about 0.25 percent of the transaction value.
There are no limits for prepaid debit cards, which typically charge merchants about 1.70 percent, said David Robertson, publisher of the Nilson Report. (For credit cards, the rate is about 2.05 percent.)
Big banks are muscling in on a product that before Dodd-Frank was largely offered to low-income consumers by specialty companies, such as Green Dot Corp, NetSpend Holdings Inc and Meta Financial Group.
Banks like Minneapolis-based U.S. Bancorp and Birmingham, Alabama-based Regions Financial Corp are also using the card to attract customers that might otherwise use check cashing services.
In June, American Express started offering prepaid cards in a bid to expand its payments business beyond the wealthy, its traditional customer base. American Express, like Chase, says that its cards are low-cost compared to others.
Fees for prepaid debit cards vary widely, and can be levied for putting money on the cards, making payments, and withdrawing cash from an ATM, among other things. According to website NerdWallet, in one common scenario for use fees range from $37 a year to more than $400.
(This version of the story has been corrected to fix a typographical error in second paragraph to change debt to debit)
(Reporting by David Henry in New York; Editing by Tim Dobbyn)
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