DES MOINES, Iowa-It may not be long before prepaid reloadable card transactions overtake checks, and it's possible that at some point such transactions could even eclipse cash.
That's the take of one card processor, who, along with several CU execs, sees a bright future for prepaid. Plastic card analysts say it's time more credit unions offer the card, both as a means to drive top-line revenue in the face of shrinking debit interchange and as a strategy for expanding membership-especially with the underbanked and Gens X and Y. Sources extolled those advantages of prepaid, citing its fast, double-digit annual growth in the combined financial and non-financial marketplace.
"Prepaid some day could become the third most common form of payment behind debit and credit," said Jeff Russell, senior advisor for The Members Group. "We've seen prepaid grow quickly, backed by companies like Walmart, and recently Green Dot (a provider of prepaid cards) acquired a bank. I think that's a strong sign of the potential here."
According to the Mercator Advisory Group, the amount of money loaded onto prepaid cards is expected to more than double over the next four years.
Russell said credit unions and banks have been slow to expand into prepaid, but believes that is changing due to prepaid's benefits, such as spending control, overdraft avoidance, and simply the ability to put plastic into the hands of consumers who could not get a debit or credit card.
"The underbanked either take their check to the check casher and pay a big fee, or they load their prepaid card and access services they could not before, like renting a car or paying for a hotel room," said Russell. "I see this card helping credit unions serve a number of markets they could not before."
Sources emphasized that the move into the prepaid space should be made as an extension to the credit union's current card line and the card should not be cross sold to existing debit or credit card holders. "Prepaid competes against debit because the cards have similar functionality," said Russell. "But they serve different market segments. It is unlikely you will switch out someone who has had a debit card in their hands for years."
Consumer segments prepaid appeals to are youth-who don't like checks-parents of college students, businesses to serve as payroll cards, travelers-especially those heading overseas-and the underbanked. Piedmont Advantage CU in Winston-Salem, N.C., for example, just moved into prepaid, piloting a card the CU expects will increase revenue and membership.
Adding 17% Growth
"Seventeen percent of our checking account applications are declined based on our criteria for fraud and risk," said VP of Development Belinda Wilson, who noted the $212-million CU serves a large low-income segment. "Prepaid gives members an alternative to the checking account, so this automatically adds 17% to our membership growth."
Like most prepaid cards, Piedmont's product can be loaded via payroll deposit, ACH transaction, funds transfer from another internal account, or cash. A $4.95 monthly fee is waived if the member at any time in the month takes the card's balance to zero. "We more than make up the waived fee with the transactions," Wilson stated.
Those transactions aren't bad, Wilson noted, especially in the wake of the Durbin rules. "The current blended interchange rate financials have experienced with prepaid is 1.3%. However, Visa notified us they will be increasing prepaid interchange to 1.7% in 2012."
Wilson said the credit union likes the fact it can now reach out to a higher-risk market with a checking-like service, but without the checking risk. "We like the fraud protection prepaid provides. You can set daily limits. People can check their balances online, and most of all you eliminate check fraud."
Opportunity Is Seen
The Members Group sees a big opportunity for credit unions and prepaid, enough to create a new client service department around the product-TMG Retail Payments Team. Russell said the area will help CUs not only introduce prepaid but will support client portfolio growth and provide prepaid cardholder service. Russell said the department was added to address a dramatic uptick-more than 20 CUs jumped on board this year-in the number of financial institutions offering TMG's ATIRA-brand suite of prepaid products: the ATIRAreload, a Visa general-purpose reloadable card; ATIRAgift, a Visa open-loop gift card; ATIRApay, a Visa payroll card; and the Coopera Card, a Visa reloadable card designed specifically for Hispanics. "We believe this is a good entry product for the Hispanic demographic," said Russell.
The $175-million Amarillo Community FCU, Amarillo, Texas, is piloting the Coopera Card and sees it as a means to build trust with an important and growing segment of its community. "In Texas one in five dollars of purchasing power is in Hispanic hands. Yet, Hispanic Texans are five times more likely to be unbanked than the state's Caucasians," said CEO Arna Reynolds.
ACFCU charges members $4.95 to obtain the card and then the same price each month. It carries a $5 minimum reload amount, and a $20,000 maximum to prevent money laundering, Reynolds explained. The CEO pointed out that two prepaid cards can be tied to one account. "That is attractive to individuals who wire money out of the country. They can load the card here and the second card can be used outside the U.S. to access the funds."
Reynolds said the credit union has been offering a general-purpose reloadable card to its membership for six months, but that product has only been taken by 100 members. She agreed that prepaid is a better fit for a member segment with a specific need. "Like college students. Parents like the ability to load the money here and have it go to the student's card. It's easy and they control the spending, even direct where the money can be spent."
ACFCU has not offered traveler's checks for the last year and sees the card as filling that member need. PSCU's James Guild predicts that prepaid will eventually replace traveler's checks at credit unions. The chief sales officer told Credit Union Journal that PSCU sees a strong future for prepaid, and noted that 2011 has been the company's best year for signing up CUs to prepaid programs.
"I see the momentum building," said Guild. "I see more credit unions getting involved, whether to replace traveler's checks, meeting the needs of the underbanked and youth, or serving SEGs with customized cards. I think this is a very flexible product."
