Hip-Hop Mogul Russell Simmons Launched a Credit Card To Help Poor People. What Went Wrong?

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RushCard, a prepaid debit service owned by hip-hop mogul Russell Simmons, will pay $19 million to settle a lawsuit with its customers for a technological “glitch” that prevented more than a hundred thousand low-income Americans from accessing their funds during a days-long outage.

Last fall, the service botched a “technology transition” over Columbus Day weekend, inadvertently freezing the accounts of 132,000 of its estimated 300,000 users. The financial mess—resulting in unfilled prescriptions, bounced checks, and eviction notices—drew the ire of the Consumer Financial Protection Bureau and resulted in a class-action lawsuit.

That suit, originally filed in the Southern District of New York, has resulted in a $20.5 million settlement (including $1.5 million in lawyer fees), according to court documents that surfaced last week. The money will go toward reimbursing cardholders for costs incurred while their accounts were frozen. During the crisis, RushCard went from prayers to promises, vowing to create a $2-to-3 million fund to cover these unexpected expenses. The Cincinnati-based company also dropped its egregious account and transaction fees through February 2016, a financial mea culpa it claimed would deplete its entire 2015 profit.

[quote position="full" is_quote="true"]You just can’t get into the space of providing financial products and be that sloppy.[/quote]

Given these numbers, the $20.5 million settlement offers the illusion of a major consumer victory, though J. Michael Collins, faculty director of the Center For Financial Security at the University Of Wisconsin-Madison, urges restraint. “It sounds like a lot, but sometimes we see settlements that have another zero on them. In the grand scheme of things, $19 million is a moderate size, but it’s important to note that most of the sum isn’t a fine. It’s restitution to consumers.”

Rick Savard, the chief executive of UniRush (RushCard’s parent corporation), said in a statement that the company thinks “this settlement fairly compensates our customers who were inconvenienced.”

The episode and subsequent agreement, which is still pending court approval, has illuminated the plight faced by many of the 68 million Americans (approximately one in five adults) without traditional bank accounts. While some go prepaid by choice, preferring to bypass physical branches and avoid the myriad fees associated with big banks, most are relegated to the world of prepaid cards because of financial mismanagement. Basically, overdraft too often, and you’re in ChexSystems hell. Prepaid cards, which theoretically offer more purchase flexibility than cash and eschew the predatory rates of check-cashing, have become a necessity for millions. The industry will gross an estimated $200 billion this year, but 40 percent of prepaid card users make $25,000 or less.

“The RushCard event was a combination of a not great product plus an incompetent administration,” says Collins. “There’s no reason why a card couldn’t work well or be a serious alternative. It might be really useful for people. You just can’t get into the space of providing financial products and be that sloppy.”

Started by Simmons in 2003 when prepaid debit was less than a billion dollar industry, RushCard’s main perk is its two-day advance on direct deposits. (Although a run through Consumer Affairs shows this 48-hour headstart is no guarantee.) It comes via two basic plans: the unlimited, which doesn’t charge for in-network ATM withdrawals and transactions, but costs $10 to setup and $6 per month, and the pay-as-you-go, which is also $10 and costs a dollar for every transaction up to $10 per month.

RushCard isn’t even the only prepaid service to be owned or endorsed by a celebrity. Most infamous was the Kardashian Kard, a collaboration with MasterCard which debuted in 2010 and was quickly taken off the market after only 250 sales and a flood of criticism (most notably from Connecticut Attorney General George Jepsen) over its fees. Magic Johnson, Justin Bieber, and even self-proclaimed finance guru Suze Orman have also lent their namesake endorsements to prepaid cards, but RushCard is the only one still being swiped in 2016.

The RushCard settlement applies to all 300,000 cardholders. Users without documentation of financial strain during the freeze will be entitled to $100 each. Those with proof of their losses are entitled to compensation up to $500, but there’s a hitch: Payments already received from the company as a result of the breakdown will be subtracted from these totals. That includes a $25 apology credit issued last year, as well as the sum total accrued during their “fee holiday,” which stretched through February.

Restitution is expected in four or five months after court approval of the settlement. Card users should welcome this news, but I wouldn’t fault them for taking the money in cash.