Reloadable prepaid cards are, contrary to popular perception, more than niche products aimed at the unbanked. Prepaid card issuer AccountNow estimates that 60 percent of its cards are used by consumers with bank accounts. And research from Aite Group indicates that more than half of those who get paid via reloadable prepaid cards have checking and savings accounts.
As more consumers become comfortable using prepaid cards, some suggest there might be an opportunity for banks. Perhaps prepaid cards could be a complementary product—or even an alternative—to free checking accounts. That view is being further fueled by regulatory changes. Analysts say moves to limit debit overdraft fees and interchange revenue are putting free checking at the risk of extinction.
The proposal to regulate debit interchange exempts prepaid cards issued by the likes of Visa, MasterCard, American Express or Discover. So banks are now beginning to explore the economic case for expanding prepaid offerings. But calculating the revenue they might lose from debit fees against the expense and risk of prepaid programs is only one consideration. The proposed prepaid interchange exemption certainly is inviting, but "there are multiple factors involved in this thing," says Michael Flores, chief executive of the Georgia consulting firm Bretton Woods.
Though an exemption from the interchange limits might give prepaid cards a revenue advantage over debit cards, banks would likely still have to calculate the traditionally higher back-end costs associated with prepaid cards, which need separate processing deals to handle features like funds-loading, says Flores. Debit cards are handled as part of a bank's core-processing arrangements; used for more transactions than prepaid cards, they also benefit from the economy of scale. And since most reloadable cards are serviced by retailers, banks would have to consider working out agreements with them to give customers more sites where they can add money to their cards.
Though prepaid cards could be helpful for low-end customers with lots of overdrafts, Aite Group analyst Gwenn Bezard sees little chance banks will force wholesale changes in customer relationships. "I don't think you can simply say, 'Let's drop checking,'" says Bezard. "It's not just about interchange."
But as prepaid card use grows—transaction levels of about $200 billion over the next two years could reach $440 billion by 2017, according to a new MasterCard study—the expenses may scale down. "My experience is that debit card processing is about equal to costs of reloadable prepaid card processing today," says Cathy Corby Parker, chief strategy officer of FSV Payment Systems, a prepaid processor. Offering a reloadable prepaid card rather than a checking-based debit card is "a viable option," she says.
MasterCard's senior vice president of prepaid solutions, Laura Kelly, says the company has no program to encourage issuers to segment low-deposit checking customers for replacement prepaid products, but is keeping tabs on any nascent trends. "If [prepaid] can serve a particular customer segment, then I think that could be an opportunity for our issuers."