Solid Reasons for the Unbanked to Shun Chase's New 'Liquid Card'

Liquid cardWhen bankers come up with a new wonder product, it's rarely good news for consumers. JPMorgan Chase's (JPM) new "Liquid" card is no exception.

Unveiled last week, Liquid is touted as "a reloadable card that offers customers financial control and flexibility with the convenience of Chase's extensive branch and ATM network." Co-branded with Visa (V), Liquid can be used much like a credit or debit card to withdraw cash from ATMs, pay for purchases in stores and online, and even pay the electric bill.
It offers other conveniences, too. For example, you don't need to have a bank account with Chase to use the card. Plus, Liquid can be "charged" with as little as $25 initially.

These two benefits work hand in hand to benefit customers who might not have enough money saved up to open a fee-free bank account. So for the estimated 17 million "unbanked" Americans, Liquid offers a viable alternative to traditional banking. (And an introduction to Chase, which presumably hopes customers will keep on banking with them once their financial situation improves.)

But Liquid's not without its flaws. Indeed, one flaw in particular threatens to make saving up enough to open a traditional bank account harder, not easier.

Why is it bad?

Earlier this year, as you may recall, Chase was among several banks that tried to push through a $3 monthly fee for using its debit cards. Customer backlash put a quick end to that plan, but now it's back with a vengeance.

Liquid -- itself essentially a debit card for people who don't have a bank account -- comes with a $4.95 monthly fee. That's 65% more than what Chase had hoped to squeeze out of ordinary cardholders.

Let's do the math -- $4.95 a month comes to $59.40 a year. That might not sound like much, but remember: This is a fee Chase is charging, basically for the privilege of letting the bank hold on to your money and lend it to other customers.

According to personal finance site, $60 is enough money to feed a small, frugal household for a week. Instead, the bank is taking this money for itself, as the price of accessing your own money.

Sure, on the plus side, Chase says it won't charge more fees to make cash withdrawals at Chase ATMs, or to add cash to your Liquid card, for example. In a fit of unfettered generosity, Chase adds that customers will incur no fee "to check their balances." (No fee to get back your own money, or find out how much of it you've got left? Gee, thanks!) To top it all off, according to the bank's press release, "Chase Liquid's affordability and transparency will set a new industry standard for prepaid products."

Let's hope not.

Follow the Money

So why is Chase pushing this lemon so hard? Basically, it's out of necessity.

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Ever since the financial crisis hit, Congress has been putting the screws to the banking industry, passing laws to cap interest rates on credit card debt and ban the concept of "universal default," requiring overdraft protection to be an opt-in process, slashing the fees banks can charge merchants on debit card transactions -- and dozens and dozens of rules more.

One effect of all this regulation, naturally, has been to deprive banks of multiple sources of revenue they'd come to rely upon. Another effect -- just as natural -- has been to make bankers scramble to find new sources of revenues. Because any bank that fails to do so, that fails to "grow" earnings every year, or even -- horrors! -- posts an earnings decline, is going to get absolutely whacked by the stock market come earnings season.

At the risk of sounding harsh, though: That's their problem. Not yours.

Just because banks need to find new sources of revenue doesn't mean you have to play the patsy and be that source. Next time Chase comes calling, hawking its Liquid prepaid card, tell 'em no thanks. This Liquid idea just doesn't hold water.

Motley Fool contributor Rich Smith holds no position in any company mentioned. A diligent collector of points, miles, and cash back on credit cards, he's never seen the point in using rewards-less debit cards -- and sees even less logic in Liquid. The Motley Fool owns shares of JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Visa.

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