BOSTON—Though the prepaid card market's image is changing and its usage is climbing, credit unions aren't rushing to bring the offering into their cards mix.
Despite prepaid's makeover, shedding its reputation as a fee-laden product largely offered by alternative financial services providers, industry analysts question whether credit unions believe the product's past meshes with the movement's member-friendly image.
"Credit unions have not seen the value in expanding their product offerings to include prepaid debit cards while banks are jumping in with both feet," said Madeline Aufseeser, senior analyst in retail banking at Aite Group, who recently completed a study on the prepaid market.
If the trend continues, credit unions could miss an opportunity, as Aite Group expects the prepaid market to double over the next three years, both on general purpose reloadable as well as on payroll card products.
A 2012 study by the Federal Reserve Bank of Philadelphia also found that the rate of prepaid transaction growth is outpacing debit and credit.
"Credit unions are still wary about the prepaid market," said Aufseeser. "They tend to be more conservative in their approach to risk management and were easily scared off by the history of prepaid."
Old Reputation Fading
Caroline Willard, EVP, markets and strategy at CO-OP Financial Services in Rancho-Cucamonga, Calif., said that prepaid's previous reputation as mainly a product for the underbanked is fading away. "That stigma has diminished, and much of that is due the increased use of the cards. Go to any department store or supermarket and you see prepaid cards right when you walk in," Willard said.
But executives at GFA FCU in Gardner, Mass., are not convinced prepaid is worth offering, having considered the product for a while, said CEO Tina Sbrega. And at Omega FCU in Pittsburgh, CEO Troy Garvin said prepaid is always discussed at the credit union's annual planning meetings, but the card product has yet to be added.
Brian Scott, VP at The Members Group in Des Moines insisted that whether CUs realize it, many will offer prepaid soon enough.
"I realize it has been slow going among credit unions for several years, but interest is beginning to rise," Scott said. "I think, without a doubt, that within the next two years a majority of credit unions will have a prepaid program."
What is driving more interest in the product is prepaid's utility across multiple demographics. Young adults are turning to prepaid as an alternative to traditional checking accounts, as are affluent Americans who travel overseas and like the card for protection against loss-much like travelers checks.
In addition, some financial institutions are offering prepaid chip cards for members to use overseas and to pave the way to EMV conversion stateside.
Some consumers like prepaid as a budgeting tool-for themselves and for their kids headed off to college. Some credit unions as well as banks are using prepaid to attract more Hispanic consumers
"Prepaid certainly has widespread consumer appeal," said Scott, who noted uses for prepaid payroll cards is growing. "For a lot of small businesses payroll can be an expensive operation. With prepaid the business does not have to hire a payroll service to print checks-it just reloads paychecks onto the card every two weeks."
Financial institutions moving into the prepaid cards market have two primary business models to implement, according to industry analysts. They can bring the program in-house, or enter into an agent-issuing relationship with a cards processor.
Industry experts said that unless the credit union expects a great deal of volume from prepaid, a third-party relationship is best.
"With an agent issuing relationship, the processor accepts all the fraud risk but gets most, if not all of the interchange," explained Scott. Generally, the CU gets a fee from the member for issuing the card and each time it is reloaded. "If the credit union is expecting high volume, such as a payroll program, then it would be best to bring the cards in-house, accept the fraud risk but get all the interchange."
Barney Moore, senior portfolio consultant at CSCU, Tampa, Fla., said most CUs have entered into agent-issuing relationships, due to the costs for running their own programs.
'Tremendous Scale' Required
"With prepaid margins not being big, you have to have tremendous scale to make money on your own. You have to have the infrastructure and be able to manage the compliance aspect and manage the upfront costs, such as acquiring the BIN, establishing member service . . . And then there usually are significant minimums [in processor contracts] involved in number of accounts and transactions," added Moore, who estimated CUs need at least 100,000 accounts to make in-house viable.
Card income aside, industry experts noted that another prepaid selling point is the product's ability bring in new members and provide a platform to develop deeper relationships.
"Prepaid is a great way to connect with the younger community," said Scott. "Get a prepaid card to 15- and 16-year-olds. It's a perfect way for them to learn about managing money and parents can reload their allowances on the card. Youth get to know the credit union-every time they pull out their prepaid card they see the CU's logo."
A Second-Chance Product
CO-OP's Willard sees prepaid as a tool to help members who may have suffered financial difficulty during the recession re-establish their relationship with their financial institution and then migrate to traditional products.
"If members have had trouble managing their checking account, such as too many overdrafts, use prepaid like second-chance checking. Get them managing their finances again and get them back into the fold."
Despite credit unions moving slowly into the prepaid space, the tide may turn. Vladimir Jovanovic, senior manager for prepaid products at PSCU, St. Petersburg, Fla., said competitive pressure will prompt more credit unions to offer prepaid. "Within the next year prepaid will need to be part of any comprehensive credit union card offering," said Jovanovic.
TMG's Scott added that prepaid is a product that credit unions cannot ignore.
"I just talked with one CEO who said he does not see the value in prepaid, where the member basically pays a premium to load cash onto a card. But he understands that a lot of people want it, so he signed up for a program on the on the spot."
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