Imagine you’re in line buying college textbooks for the new semester. As you move up in line, you realize you don’t have enough money to cover the cost of the books.
You call your parents from your cell phone to ask for money. They immediately transfer funds into the account via their cell phone or from a computer, and by the time you reach the cash register, voila, you have money in hand.
That’s just one scenario behind a new debit card called Ethos. Launched last November by Affinity Card Systems Inc., Ethos is a Visa card that is linked to an FDIC-insured savings account at West Coast Bank.
Dubbed as the "be your own bank" card, the Ethos tries to bring debit card benefits to the masses with easy application terms and payroll features. The Ethos card offers bill payment, fund transfers, text messaging on cell phones, and direct deposit. Deposits can be made using other linked accounts or in person at Moneygram International locations.
The account gives cardholders access to a free discount pharmacy program. Ethos also allows parents to add their children to the account, set spending limits on withdrawals, and be alerted via text message of their child’s use of the card.
"It’s a very low-cost way for a college student to manage their financial situation," said Terry Lock, CEO of Affinity Card Systems.
Helping the Unbanked
Cardholders can turn their account on or off by phone so it cannot be used for any new transactions. Because the card does not require a credit check, the company touts Ethos as a secure way for the "unbanked," consumers without a bank account, to have a banking card.
The card costs $6.95 to activate and costs $3.95 a month. Ethos also carries Visa’s Zero Liability policy, in which an accountholder is not responsible for unauthorized charges if the card is quickly reported as stolen or lost.
"It’s a product that can’t be overdrawn," Lock said. "It’s got great mobility and security features."
Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms, Inc., thinks that for those who can’t get a regular checking account, the Ethos may be a good alternative.
"I could see limited benefit to a select group of consumers," he said.
Arnold said the card’s monthly fee adds up to $50 a year. He pointed out that the card allows people to rebuild their credit and that the savings account Ethos card does not charge interest fees.
"To me, building your credit, particularly as a student, that’s so important in our society today," he said.
Credit Card Security
Some critics argue that debit cards don’t always offer the same protection with electronic funds transfers because of a loophole in the transfer process. Gail Hillebrand, a spokeswoman for the consumer watchdog group Consumers Union, believes that depending on how the card is structured, cardholders may or may not have all the protection listed under their liability plan. Having a card in your name doesn’t necessarily cover what’s going on behind the scenes, according to her.
Hillebrand said that anytime you send money through a non-bank entity there’s some exposure for the consumer because the money could be held in an account along with other people’s funds—in a separate account that pays on the account that is not in your name. Because the holder of the money behind your card isn’t in your name, the account may or may not be covered if fraud occurs.
"The problem is you can’t tell [who is covered] with your card," she said.
Hillebrand admits that Visa and MasterCard have voluntarily issued a Zero Liability policy intended to protect Ethos cardholders.
"We think that’s not good enough," she said.
Linda Sherry, a spokeswoman for the Consumer Action consumer advocacy group, argues that there are often enormous fees associated with prepaid credit cards that permit users to set spending limits. Prepaid cards allow adults to control a teenager’s spending, but fees can be about $15 to reload the card once the funds are all spent. The cards are often branded to appeal to young people, according to her.
"Any of these innovative cards should not come at the cost of enormously high fees," Sherry said. She also questioned the practice of having spending caps on credit cards.
"Why do they need a cap on spending?" Sherry said. "A credit card is supposed to come with a cap on spending. Unfortunately, they let you go right by that limit, and then charge you fees."
Arnold thinks that having extra card features such as limiting transactions is good, but he says that consumers are not taking advantage of the safeguards. He added that programmable cards require more work from the cardholder.
"There’s an extra step," Arnold said. "You’ve got to program it. They have to set the limit themselves. Therein lies the problem. Any time there’s an extra step, most consumers won’t want to mess with it."
© 2008, Young Money Media, LLC. All rights reserved.