How Prepaid Providers Painted Themselves Into a Corner

A question that has been gnawing at me for some time came to the surface again recently after I attended a cards conference that hosted a separate day of sessions for people interested in prepaid. It was question I had also been reflecting on while attending an expo exclusively for prepaid card providers a few weeks before:  Why is debit considered a product, yet prepaid has its own industry?

When debit came on the scene in the 1980s, it was aligned with credit cards. The credit card industry morphed into the cards business and then eventually the payments industry.  In the 2000s when prepaid cards were launched, prepaid was introduced as a whole new industry.  This raises the question, why?  What is so different about prepaid that it couldn’t fit into the payments business?

We hear a lot that prepaid is different because its value chain is more complex.  With program managers and marketing agents sitting between issuing banks and consumers, prepaid is distinctly different from debit where the issuing bank sells directly to consumers.  But a parallel situation existed with merchant processing and ISOs at about the same time debit emerged.  Merchant processing was both sold directly by financial institutions to merchants, as well as through independent sales organizations sponsored by issuing banks.  And yet the merchant processing industry was a big enough tent to handle both models of acquiring.

Some might argue the need for a new industry was driven by the nature of the prepaid consumer: a low-to-moderate income, younger consumer, less sophisticated in financial affairs.  That description may accurately describe the early payroll and general purpose reloadable card market, but prepaid, even in its earliest days, was also about gift cards, health care cards, employee expense cards and incentive and rebate cards.  Based on some early prepaid reports, funds loaded to GPR cards in 2006 represented less than 60% of total branded prepaid card loads, indicating mainstream Americans have been using prepaid cards since the earliest days of the product.  If the need to protect the underserved was the driver behind carving out prepaid as a separate industry, that slice took a lot of collateral business with it. 

Maybe it was that prepaid platforms were fundamentally different from debit platforms?  Prepaid platforms were birthed nearly 20 years after debit platforms and are inherently more robust and flexible.  But credit and debit platforms were also fundamentally different.  Certainly many providers exhibiting at early card industry trade shows offered credit or debit, though not both, but they still exhibited at the same shows.

Does it matter?  Other than a proliferation of trade shows, is there really a downside to prepaid being considered an industry rather than a new deposit product?

I would suggest it matters a lot.  The heightened regulatory focus on prepaid products may be a direct result of early positioning as a business distanced from the rest of the payments industry.  And, the perception of prepaid being fraught with regulatory issues has slowed its adoption at financial institutions as a new deposit product, forcing consumers and businesses to buy prepaid products outside of their trusted channels or forgo the benefits.

Today, reloadable prepaid – which, after all, is virtually the same as debit when it comes to know-your- customer, Office of Foreign Assets Control, consumer protection and most other regulations – is often referred to as an unregulated product.  Regulators and consumer organizations claim a greater need for consumer protection for prepaid, but don’t make the same requests for debit.  Funds in prepaid card accounts at financial institutions may soon be considered cash when crossing the border, while funds associated with debit cards will not.