JPMorgan Chase Steers Low-End Clients to Prepaid Cards

JPMorgan Chase & Co is seeking to move its least profitable checking customers into new prepaid debit card accounts to boost earnings in a business crimped by new regulations.

The cards work like checking accounts except that customers cannot write checks and overdrafts, and instead they pay with a swipe or by entering the card number on a website.

A loophole in the 2010 Dodd-Frank financial reform law allows banks to charge merchants higher fees for processing payments made with this type of debit card.

Chase said on Tuesday it will market the cards - with a relatively low $4.95 monthly fee - mainly to people who frequently overdraw their accounts, keep low balances, or do not qualify for a checking account at all. It is not adding extra fees for deposits or withdrawals at its ATMs or branches.

The move could pressure other debit card issuers to reduce fees and could prove to be a low-cost way for the industry to provide basic financial services to people who live paycheck-to-paycheck.

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.

Chase, the bank's retail arm, hopes 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.

Many banks are going the same route as JPMorgan Chase and moving unprofitable customers into prepaid debit cards. The product generates fees and also lowers 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 in an interview.

Between new regulations on fees and low returns on customer deposits as interest rates have dropped, JPMorgan Chase estimates that about 10 percent of its accounts do not generate enough revenue to cover their incremental costs, such as check processing and deposit insurance.

Chase, the third-largest U.S. consumer 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.