Column: Hip-hop mogul Russell Simmons saddles customers with a financial disaster

Russell Simmons has long been famous as a multimillionaire hip-hop music producer. Now he’s known to thousands of fans and followers for something else: His branded prepaid debit card, a financial lifeline for its low-income customers, locked many of them out of their accounts for more than a week.

In a statement on his Facebook page, Simmons attributed the problem, which began Oct. 11, to an upgrade to “a new processing partner” that “did not go as planned.” In compensation, he said his company, UniRush, would waive all fees on the cards from Nov. 1 through the end of February.

But that may not adequately compensate thousands of customers who depended on the card for daily transactions at ATMs and shops. Many have taken to social media to report that they’ve spent a week or longer without access to their money and found it difficult or impossible to reach customer service.

Simmons says on his Facebook page that his company has been “working 24/7” to restore full service to the cards and that most should now be working normally.

The RushCard, which Simmons introduced in 2003, is representative of a lightly regulated corner of the financial services industry that caters to the needy. Customers deposit cash or paychecks or have them direct-deposited by their employers, and then use the cards as conventional debit cards at stores or ATMs. But because they often live paycheck to paycheck, they may not have the resources to tide them over when their RushCard accounts are inaccessible or blocked.

The technical disaster has unfolded largely under the media radar, possibly because members of the card’s customer base live under the media radar. They’ve certainly been outside the customer base of the big banks — typically they’re the “unbanked” or “underbanked,” in industry parlance. Those categories encompass as many as 68 million adults, or up to one-third of U.S. households, according to the FDIC. A large proportion are black or Hispanic.

Without access to conventional bank accounts, whether because they don’t have reliable income or spare resources to maintain an account balance, they have to resort to high-fee debit cards as an alternative to cash and even for (very high-priced) credit.

Consumers Union last year flayed the industry for excessive and confusing fees and observed that, although deposits into the card accounts typically are covered by FDIC deposit insurance, the category lacks numerous crucial regulatory safeguards.

Last November, the Consumer Financial Protection Bureau proposed regulations for the prepaid debit card industry, but those have been vehemently opposed by the industry. In September, 43 House Republicans sent a letter to CFPB director Richard Cordray urging him to be more tolerant of the industry. “Prepaid cards provide a broad array of customers ... with revolutionary ways to access, spend, and manage their money,” they wrote.

Prepaid debit cards frequently attract celebrities as their front persons; often they blow up in their putative sponsors’ faces. Personal finance guru Suze Orman put her name to the “Approved” card in 2012 and had bailed out by 2014. Rapper Lil Wayne, Justin Bieber and Magic Johnson all jumped into the market at one point or another. The idea was to give customers a way to associate themselves with the luminaries, like children carrying lunchboxes with the images of their favorite cartoon characters.

The most spectacular flameout was the Kardashian Kard, which lasted less than a month before the celebutantes took it off the market amid a torrent of vilification. Much of the criticism was aimed at its stratospheric fees, which included up to $99.95 just to acquire the card and a $7.95 monthly fee that kicked in after a year.

These cards often are issued by small banks headquartered in states with indulgent banking regulations, which they can apply to customers nationwide. Orman’s card was backed by Bancorp, a Delaware bank; Simmons’ RushCard by MetaBank, which started in 1954 as the Storm Lake (Iowa) Savings and Loan Association and is now headquartered in the lax banking state of South Dakota. We sought comment from MetaBank but haven’t heard back.

Like many other such cards, Simmons’ RushCard comes barnacled with fees (though some have been reduced since the card’s introduction): up to $9.95 to acquire the card in the first place, a monthly account fee of up to $7.95, $1 for every transaction, a $1.95 “maintenance fee” for months without transactions. For holders of legitimate bank accounts, such fees are typically zero.

Unlike other prepaid debit cards, the RushCard does offer some bank-like benefits, including the ability to pay bills. But its benefits can be oversold. Among its come-ons is that direct-deposit customers can get their money “up to two days sooner.” That might have sounded like a two-day advance on their paycheck, but the fine print — and it’s really fine print — reveals that this is two days sooner compared with the hold other banks might put on paper check deposits; is available only if the depositing employer notifies RushCard the deposit is coming; might not happen anyway; and the amount might be limited.

RushCard brags about being ranked excellent by Consumers Union for “fee accessibility and clarity, convenience and safety for its customers.” What is doesn’t mention is that CU also ranked it “poor” or “fair” in “value.”

That’s typical of CU’s rankings, except for a handful of cards issued by American Express, Walmart, Chase and Green Dot Corp., which get somewhat higher rankings.

The big problem, however, is that the major banks that provide most Americans with their daily financial services have been averse to serving the lowest-income minority customers. They’ve opened the door to the prepaid debit card industry, and the customers may not be getting the best of it.

Keep up to date with the Economy Hub. Follow @hiltzikm on Twitter, see our Facebook page, or email [email protected].