It's been a month since a botched systems upgrade left hundreds of thousands of RushCard customers locked out of their prepaid debit card accounts — some for a few days, others for several weeks. For a user base largely consisting of low-income minorities without savings to fall back on, the impact was devastating.
RushCard, founded by hip-hop mogul Russell Simmons, is now in hot water with federal regulators and risks losing one of the most loyal customer bases in the prepaid debit card industry. Over the last two weeks, Yahoo Finance spoke to dozens of RushCard users to see how they are coping in the wake of the outage, as well as experts who helped us try to piece together what went wrong.
What happened to hundreds of thousands of RushCard users last month – when a botched software upgrade and the ensuing customer service crisis blocked access to user funds – wasn’t a run-of-the-mill snafu, experts say.
“I have a suspicion this is one of those sort of hundred-year storm situations where everything that could go wrong did,” said Ben Jackson, a prepaid card industry analyst with Mercator Advisory group.
Many prepaid debit card companies go through a process like the one RushCard began in the early morning hours of Oct. 12, when it prepared to switch from one payment processor to another. What many prepaid debit card users don’t realize is that companies like RushCard are merely the shiny wrapper on the outside of a complex machine. In order to work, prepaid card companies enlist help from two sources—a payment processor that handles day-to-day transactions and an actual bank to store funds customers deposit.
Payment processing companies are constantly competing for lucrative contracts with companies like RushCard. In the spring of 2014, MasterCard won a bid to replace RushCard’s longtime processor Total Systems Services (TSYS). A TSYS spokesperson told Yahoo Finance the service failure “had nothing to do with TSYS or the prior relationship we had with RushCard.” A rep for MasterCard said their prepaid processing group has been working with RushCard to address the problems but did not comment further.
With federal regulators looking into the system failure, the company could not give details on the days following the initial outage, said RushCard spokesperson Larry Kopp, but he confirmed preparations for transition had been underway for nearly a year. A spokesperson for the Consumer Financial Protection Bureau, which said last month it will “get to the bottom” of the RushCard fiasco, said they do cannot comment on any potential or current investigations.
Amir Wain, founder and CEO of i2c, Inc., a global payment processing firm that works with many prepaid debit card issuers, explained how RushCard might have run into trouble making the system upgrade.
“[During a processor migration] you have to move all customer balances at one point in time, take a snapshot of the old system and recreate that snapshot in the new system,” Wain said. “There’s always a short window of time where you need to be very well-prepared and need to have done your testing before you switch.” RushCard gave itself five hours to complete the transition, according to an e-mail the company sent to its customers.
Wain said some processing migrations require more than a year of preparation, including weeks of parallel testing — a crucial process in which the existing system keeps running while the company starts shifting data to the new one to test it out. The goal is that by the time the company is ready to flip the switch on the new system, most user data will have already been transferred and there will be minimal lapses in service.
In similar cases, a company should have been able to revert back to the old system as soon as it realized things hadn’t gone according to plan, according to Wain.
“I can 100% understand that a technical migration can cause problems. It has happened to the best of the best,” Wain said. “Why wasn’t there a contingency plan? I can’t say.”
Changing the story
Two other issues exacerbated the initial outage and the lapse in service it created: conflicting messages from the company about when service would be restored and a breakdown in RushCard’s customer service system.
Within 24 hours of the initial outage on Oct. 12, RushCard and its co-founder, hip-hop mogul Russell Simmons, posted writtenupdates on Twitter assuring customers “most of the problems have been resolved” and “RushCard is now back up and operational,” even as thousands of users flooded the company’s social media pages with complaints. Simmons backpedaled in a tweet on Oct. 16, four days after the outage occurred, saying about 10,000 people were still experiencing trouble. “Sorry for wrong info,” he wrote. Ten days after the blunder, as federal watchdogs said they were looking into what caused the meltdown, the company said some customers who were impacted by the original outage were still waiting for relief.
Adam Rust, research director for Reinvestment Partners, a North Carolina-based consumer advocacy group, specializes in bank alternatives like prepaid debit cards. Although RushCard’s customer service operation is generally considered among the best in the industry, Rust said the company’s efforts to keep affected customers in the loop did more harm than good.
“With crisis management, you don't want to have keep changing your story,” Rust said. “I heard Russell Simmons taking responsibility but then I heard him saying it’s going to be solved in 24 hours. Then a day later, it’s going to be solved, but not yet. The uncertainty the consumers had, he wasn’t really relieving them of that.”
Uncertainty is something many RushCard customers can’t afford. More than one-third of prepaid debit card users report earning less than $25,000 a year and turn to prepaid debit cards like RushCard as a last resort after getting squeezed out of the banking system. They may live in an area with little if any traditional bank presence, or they may have been turned down by banks for having a poor banking history. In many cases, it may be their only financial account. Prepaid cards aren’t bank accounts, but they allow customers to store their cash in a relatively safe place (prepaid cards typically store funds in a third-party bank which is FDIC-insured) and spend it like any other debit card user. They don’t require a credit check or a bank account.
Prepaid debit card companies, including RushCard, encourage users to deposit their entire paychecks onto their cards by offering perks like two-day advance payroll deposits. The glitch in October happened just two days before many RushCard customers expected to receive their early payroll deposits, and many deposits were unable to be completed as a result. Without savings or backup fund, bills went unpaid, late fees piled up and landlords threatened to evict tenants who couldn’t pay rent.
The confusion caused by the faulty upgrade led to a customer service nightmare. Calls to the company’s phone lines more than tripled from an average 5,000 calls a day to 15,000 to 20,000 calls. The company added as many additional lines as it could but still struggled to keep up with the deluge. Customers complained of waiting over an hour to speak with representatives, only to be mysteriously hung up on once they got through.
“I personally called RushCard 60-plus times only to be on hold for hours and hung up on,” said Vanessa Tackett, 28, who lives in Lexington, N.C. Tackett lost access to her account for 17 days, from the first day of the outage on Oct. 12 to Oct. 29. “I had to borrow money to get my medications. It’s going take me [time] to get back on track with all the money I owe out now. This has been a nightmare.”
For a while, the RushCard website where users manage their accounts lost service. Confused as to why they couldn’t log in, some users tried logging into their accounts so many times they triggered fraud alerts that temporarily locked them out. Other customers reported seeing incorrect balances in their accounts. On a normal day, a quick phone call to customer service would have resolved these matters, but people couldn’t get through.
In a video posted online Nov. 6, RushCard founder Russell Simmons said he was committed to preventing another crisis. “We still have have tremendous stories of hardship that we know we helped create,” Simmons said. “It has led me to the realization that we can be better.”
The RushCard outage — and the extraordinary amount of time it took to fix it — served as a poignant reminder of the fiscal vulnerabilities of prepaid debit card users.
When Simmons founded RushCard in 2003, the multimillionaire hip-hop icon-turned-business-magnate was at the forefront of a decade of enormous growth in the prepaid debit card industry. This period was partly fueled by two major economic downturns and a clamoring among brick-and-mortar banks to raise fees in order to meet rising overhead costs, elbowing low-income consumers out of the banking system in the process.
Consumers loaded $65 billion onto prepaid cards in 2012, more than twice the amount loaded in 2009, according to a 2014 report by Pew Charitable Trusts. Twelve million people use prepaid debit cards each month.
For the better part of a decade, RushCard charged some of the highest fees of any prepaid card on the market ($9.95 per month, $1.95 for ATM withdrawals, $1 each time users swiped their card). Consumer advocates routinely called it out as one of the worst prepaid debit cards on the market. When Simmons came to a 2011 Occupy Wall Street rally to show solidarity with protestors, activists turned on him, lobbing remarks about RushCard’s onerous fees. Less than a year later, the company rolled out a new, less costly fee structure (monthly fees were knocked down to $5.95 - $7.95 and swipe fees were eliminated).
Where celebrity-backed prepaid debit cards from the likes of the Kardashians and Justin Bieber quickly fizzled out, RushCard has succeeded in spite of critics. It’s accomplished this largely because of Simmons’ popularity with customers, many of whom are working African-Americans. Simmons is also unique in his willingness to lend his face to the company’s brand, regularly appearing in TV ads and marketing campaigns (although talk show host and Green Dot spokesperson Steve Harvey could give him a run for his money).
It was likely because of this strong connection to his user base that when RushCard executives realized just how bad the problem was, it was Simmons who appeared in a 90-second video apologizing to customers. In the ensuing chaos, with RushCard’s customer service lines overwhelmed by the volume of calls, Simmons personally phoned customers and encouraged people to message him directly on Twitter. In cases where customers were in dire straits (facing eviction, unable to pay for medications, etc.) the company sent money via wire transfer services like MoneyGram, according to several customers.
In a statement to Yahoo Finance, Simmons said he is intent on restoring his customers’ faith in his product: “We realize that we did not live up to those high standards over the past two weeks, which is why we are committed to doing the right thing and learning from this experience, so we can restore trust with our current and future customers.”
RushCard, which is privately-held, does not disclose how many customers it serves. Ben Jackson, the Mercator analyst, said RushCard is likely among the 10 largest in the industry, a list topped by Green Dot (GDOT), with 4.5 million active users, and NetSpend (TSS), with 3.6 million active users, according to the latest SEC filings for both companies. RushCard has confirmed that the majority of its users were impacted by the glitch but declined to say how many have closed their accounts since the outage.
“The prepaid industry is a competitive space,” Rust said. “If RushCard loses all those direct deposit customers, they would probably start struggling.”
Some customers told Yahoo Finance they were offered a “loyalty credit” — $25 to be added to their accounts, which representatives told them they could keep if they stuck with the company. The company did, however, announce a fee-free holiday period from Nov. 1 to Feb. 29 and has set aside several million dollars to compensate customers, although it’s not clear yet how the fund will work.
In the meantime, a class action lawsuit has been filed in New York on behalf of customers seeking restitution.
Hunter Shkolnik, an attorney representing RushCard customers, said he will fight the class action ban included in RushCard user agreements. As is often the case in customer agreements, the class action ban includes a clause that requires customers to pursue litigation individually through an arbitrator, a process that would occur behind closed doors.
“I think we have a very good chance here,” Shkolnik said. “My clients do not remember seeing that provision [banning class actions] when they signed up. A lot times customers get to accept an agreement without reading it and I think here there was a flaw in the way [RushCard] presented it.”
The RushCard fiasco happened at an interesting time for prepaid debit card issuers. Certain types of prepaid cards are already under the purview of watchdogs like the CFPB and FTC, like gift cards and cards used to issue government benefits like Social Security funds. In early 2016, the CFPB was set to finalize new rules that would apply federal consumer protection laws to all prepaid debit cards, including rules around electronic fund transfers such as payroll deposit.
An imperfect advocate for the working poor
To its credit, RushCard has done plenty of financial educational outreach over the years. On its blog, there are articles and videos encouraging customers to shore up emergency funds, save for retirement through 401(k) plans and cut unnecessary expenses to help them stay out of the paycheck-to-paycheck trap. But there’s an inherent conflict of interest when any financial services company offers advice to their clients — it’s bound to be skewed in its favor.
A close reading of RushCard’s website found no mention of any specific free savings tools that could help users weather financial emergencies. RushCard does, however, tout its Rush Goals product. A sister to the everyday Rush Card account, Rush Goals allows users to save up for short-term goals on the side and track their progress. In a recent blog post published as part of a series called “Smart Money Moves,” RushCard encourages people to save three to six months’ worth of living expenses in a Rush Goals account. However, the account does not earn any interest and, in a separate FAQ page, the company acknowledges “Rush Goals is not a savings account.”
There is one “perk” with Rush Goals. Once customers have saved $500, the company offers a $2 discount off its monthly fee (again, that fee is $5.95 or $7.95 a month). Let’s say a customer somehow manages to go a whole year without getting hit with any of RushCard’s other fees ($2.50 for out-of-network ATM withdrawals; 99 cents to transfer funds to another user’s account; a $1.95 monthly maintenance fee, to name a few). That person would still wind up paying $47.40 to stash their savings with Rush Goals for one year. That’s nearly 10% of the $500 he or she would have to save to qualify for the $2 “discount” in the first place.
Would a Rush Goals “savings” account have helped those consumers locked out of their accounts during last month’s outage? Not likely, given that Rush Goals funds are tied to the same pot of money as users’ standing RushCard funds. An emergency fund does little good if you can’t access it in an emergency.
Moving forward, RushCard said it is in the process of conducting an internal investigation into the outage, as well as cooperating with federal regulators.
“We’re investigating how it happened, but it doesn’t matter,” Simmons said in the video posted online last week. “What matters is you got hurt. For that I am deeply sorry.”
Of the dozens of customers Yahoo interviewed who said they are still facing issues with RushCard, only one — 37-year-old Jason Coleman of St. Louis, Mo. — was in a forgiving mood. Coleman’s RushCard expired at the beginning of October. It couldn’t have been worse timing. In the aftermath of the glitch, his replacement card never arrived and his card stopped functioning on Oct. 31, a day after he received his paycheck via direct deposit. He’s been unable to access his funds since.
“I want to support a black-owned business and I’ve liked Russell going all the way back to the beginning of Def Jam [the record label Simmons founded in 1984],” Coleman said. But as he went over the list of bills he’ll likely miss this month and the debts he owes friends and family who’ve loaned him money, Coleman’s resolve wavered.
”Once I get my money out of there I’m going to go open up a bank account,” he said. “I’m going to have to be done with RushCard. I can’t keep going through this.”
Cassandra Coates happened to misplace her RushCard the week of the outage. Under normal circumstances, she could have gotten a replacement card sent to her within a couple of business days (for a $30 fee). But because the company’s phones were so bogged down with complaints, Coates couldn’t get through. Days and weeks passed. She missed a car payment and her truck was repossessed. Coates, who works full-time as an auto inspector in Swansea, Ill., leaned on her daughter to help her get to and from work. When their schedules didn’t line up, she was forced to call out of work, losing wages in the process.
“I see on the Internet [Russell Simmons] is setting up this multi-million dollar fund and he’s going to help us, but what are we supposed to do until then? I can’t eat. I don’t have gas,” said Coates, 42.
After Yahoo Finance contacted a RushCard representative on Monday, the company sent Coates a check for her total account balance. She has yet to receive a replacement card, but she likely won’t need it. Last week, she opened a checking account at a local credit union.
Yaisa Carr, a single mother of three in Lithonia, Ga., typically gets her paycheck deposited on the 16th of each month. She heard about RushCard’s issues but when she called to make sure her deposit was still coming, a customer service agent assured her all was well. When her paycheck wasn’t deposited, Carr panicked. She tried to withdraw funds from an ATM but got an error message saying she was an “unauthorized user.” Worried that it was unsafe to keep her account open, she went online and requested a temporary freeze until she could sort it out with customer service.
Yahoo Finance spent 35 minutes on hold with Carr and RushCard customer service in late October. When a representative answered, he told Carr her account had been closed and it would take 7 to 10 day business days to refund her remaining balance. Perplexed, Carr began to argue, explaining she had only requested a freeze. Before she received an answer, the line went dead. “What do I do now?” she said.
Unable to remove the freeze without a representative’s help, Carr remained locked out of her account for more than three weeks. During that time, her car was repossessed and Carr, who is four months pregnant, missed several days of work. On Monday, Yahoo Finance reached out to RushCard representatives to ask about Carr’s still-frozen account. Carr said a representative contacted her that evening and got her back online. But the damage was done. She’s since opened an account at a bank.
“I am really disappointed in how this situation has been handled,” said Carr. “This is inexcusable.”