Our mini-fundraiser for Water Cooler is on! As of this writing, 212 donors – our goal is 250 – have already invested to support Water Cooler, which provides both economic and political coverage, to help us all keep our footing in today’s torrent of propaganda and sheer bullsh*t. Independent funding is key to having an independent editorial point of view. Please join us and participate via Lambert’s Water Cooler Tip Jar, which shows how to give via check, credit card, debit card, PayPal, or even the US mail. Thanks to all!
Any time you pay in advance, you run the risk that the provider will underdeliver, leaving you in a weak position to argue about what you actually got, or will go out of business and not be able to complete his part of the deal. In some areas of life, the powers that be have taken steps to protect hapless citizens, or at least ones with enough means to matter. For instance, New York passed a law in 1999 to protect health club members against the loss of pre-paid memberships. The health clubs must post a performance bond which is used to compensate members in the event the gym closes or is sold.
However, in most walks of life, in our wonderful world of neoliberal markets, consumers are on their own and are supposed to be able to make informed decisions about who to trust when.
But in addition to facing routine credit risk, consumers who use prepaid services are also exposed to the risk of the provider setting up their services so as to increase the odds that they get to keep your money without providing the actual service in full or on a timely basis. In other words, the prepayment is set up to be gamed against the buyer.
There are times when that risk is made explicit. For instance, in the last few years, car rental companies have started offer the option of prepay for a full tank of gas. You can then return the car with a less than full tank and not pay any penalty in the form of having them top it up at gas prices set at punitive levels. The rental company offers a meaningful break on the gas price. Why? One obvious target is business customers who would rather not have the hassle of refilling the car close to the airport, so this is really a way of the rental companies increasing their profits by gaming the employee valuing his time more than saving a few bucks for his employer. Perhaps some readers will disagree, but I don’t regard it as attractive to those renting cars for personal use. Having used this option once when on vacation, I found it increased stress, since I was trying to optimize my last few gas buys before I turned the car in so as to be able to return the car with close to an empty tank. I didn’t come out ahead financially either, since I lost patience having to keep revising my guesstimates of how much more driving I’d do versus how full the gas tank was, with the result that I did a pretty decent refill and returned the car with a half a tank of gas in it.
Another example is when you buy a phone card while overseas to call home cheaply or have a prepaid phone and buy minutes that expire in ninety days (cell phone providers often allow you to get a package with no expiration if you buy a lot of minutes). Some users may burn through minutes quickly enough that there’s no risk of stranded payments. But the people most likely to be caught are low income individuals who can’t afford to buy a premium package and can’t even afford to make all that many calls.
But there are examples where stranding the customers’ money seems to be more central to the product design, to the degree that the hassle seems like a scheme to make the service difficult and therefore deter use. Consider this mini-rant by Josh Barro in Business Insider, in a story about why the GOP’s healthcare reform is probably doomed:
One of the stupidest aspects of Republican healthcare rhetoric is the idea that consumers want to take charge of their own care by paying routine expenses from special, tax-advantaged accounts.
These accounts have been gradually foisted on Americans over the decades. Your employer most likely asks you whether you want a health savings account or a flexible spending account. I’ve resisted using one because they are such a pain, but I broke down and set up an FSA this year through Business Insider because I decided it was stupid to forgo the tax savings.
So I put $2,600 in the account and ADP sent me a debit card. I started using it at the doctor’s office, at the pharmacy, at the physical therapist. (I threw out my back this spring, which is a reason I’ve been a little crankier than usual.)
Then, after a few months, I got a letter in the mail from ADP saying it needed my receipts. Receipts? I thought ADP got those straight from the providers. It seems it does get them from CVS, but not from the medical providers. I was supposed to be uploading those receipts through a website. Instead, I threw them away.
If I had to upload the receipts, then what was the point of the debit card? If the system requires that much paperwork, I might as well be submitting claim forms and getting checks in the mail.
Anyway, now I have to call those providers’ offices and get duplicate receipts and upload them and allow seven to 10 days for processing. Until I do that, I have been cut off from access to the money in the account — my own money — that got in the account only because Congress chose to offer a tax preference that I could get only by using such an account.
Who wants to deal with this crap?
Now I do have a buddy who is a top tax lawyer who has mentioned in passing using a HSA and never complained about it. But tax lawyers live and breathe complexity, so that’s probably not a good example. I’d be curious to hear from readers if they became less annoyed with the unnecessary bureaucracy of HSAs over time.
But one has to wonder who came up with this ludicrous debit card system. Here you could have had some streamlining of the payment system, with the added benefit of providers getting money faster, since an HSA participant would already have the provider name, address, and registration number in the system, and the date of service and dollar amount would be part of any transaction processing. All they’d need to add would be the diagnosis and procedure codes and everything would be in one record. Instead, the chump consumer has to submit the paperwork, and the bank/processor then has to match up the documentation with the charge previously paid.
It’s not clear at all what the donkey work is meant to accomplish. Perhaps the sometimes stranded money is a bug and not a feature. HSA accounts are meant to encourage “savings,” which any balances rolled over into the next year. And the accounts pay interest that is tax exempt.
Although the side effects are to increase hassle, one design priority may be to make clear that the tax risk sits with the HSA account user. From a Wells Fargo description of its HSA accounts:
The HSA debit card does not differentiate which purchases are qualified medical expenses, and Wells Fargo does not check to make sure that you are using your HSA for qualified medical expenses. It is your responsibility to understand what items are eligible. Remember, income taxes and a 20% penalty may apply to purchases that are not for qualified medical expenses. Consult your tax advisor with questions.
In other words, making sure the patient handles the paperwork may be intended to prevent the taxpayer from claiming down the road that the medical provider coded something to make the service appear to be not “qualified” when it was. Plus it may also be intended to remind the taxpayer to keep copies of the documents submitted to the bank/processor in the event of an audit.
A more clear-cut example of stranded funds are MTA/New York City Metrocards. Users can buy 7 or 30 day unlimited versions (great for commuters and tourists). The other version is “Pay Per Ride” where you load funds onto the card. If you prepay bigger amounts, you get a bonus…which now come in increments that don’t add up to the amount of typical ride. On top of that, the cards expire after about a year, with a fee of $1 to buy a new card. Now why, pray tell, do the cards expire after one year? Are they so cheap that the mag strips may become unreliable (as in this is pre-emptive so as to forestall consumer complaints), or is this penny-ante rentierism?
In theory, you can transfer the funds on your old card to a new card. But get a load of how it works:
If your Pay-Per-Ride MetroCard expires, you have two years from the expiration date to transfer any remaining money to a new card. Within the first year after expiration, bring your expired card to any subway station and ask the agent to make the transfer. After that time, the expired MetroCard must be sent to MetroCard customer claims. Ask the station agent for a postage-paid Business Reply Envelope.
MetroCard Customer Claims
130 Livingston Street
Brooklyn, NY 11201
Why is this not as nice as it seems? Just about no stations have agents these days. There are none even at an express stop like 86th Street on the Lexington Avenue line, which is one of the busiest routes (measured by the frequency of service). I dimly recall seeing an agent in recent times in one of the Grand Central ticket booths that no longer sell tickets, although this may be a misplaced memory. So basically, you have to find a scarce-as-hens-teeth agent, or send two cards to Brooklyn and hope you get one back with more money on it than you started out with.
Can readers provide other examples? It would be useful to indicate whether the stranded funds phenomenon appears to be a vehicle to nudge users into buying a bigger ticket/more profitable service (the prepaid phone service example), simple bad process design (as in the result of making what ought to be a provider problem into a user problem) or “we just can’t help ourselves” grifting?