After a decade or more on the banking industry's backburner, prepaid cards seem poised for primetime. Community banks are turning to them in an effort to reach the underbanked and as an alternative to free checking.
"With the loss of overdraft and interchange fees, banks are looking for different ways to manage checking accounts and are moving people from free checking to prepaid cards," says Ben Jackson, senior analyst for Mercator Advisory Group in Boston.
Though examples are hard to come by, a handful of community banks are planning to launch programs next year. One of these is the $395 million-asset North Shore Bank in Brookfield, Wis., which sees prepaid cards as an alternative to turning away potential customers.
When opening a new checking account, North Shore uses a system called Qualifile by eFunds to see whether people applying to open a checking account have ever had one closed by another bank or been through some other negative credit event. In cases where the people do not meet its qualifications to open an account, North Shore can offer little more than an apology.
But Gary Messing, the bank's vice president of deposit products, says it is looking into whether prepaid cards could be a substitute to help the bank establish a relationship and the customer build better credit.
The customers would be able to put money into the account through direct deposit or at the branch. And the card could be used just like a debit card to make purchases or withdraw money at an automated teller machine. "From a functional standpoint, it's very similar to a checking account," Messing says. "But you can't overdraw it."
North Shore is still working out details such as pricing, but the product would likely have a monthly fee, he says.
Messing thinks the idea is promising. "If one in 10 opportunities to open a checking account results in a decision not to do it, over time that represents a lot of potential connections with consumers lost."
Because of the economic downturn, the number of people getting turned away has gone up slightly, he adds.
After the product launches-possibly in the first quarter-North Shore also could consider suggesting it to customers with frequent overdrafts.
University Bank in St. Paul, Minn., is gearing up to offer prepaid cards to its banking customers as well and hopes to launch the program this spring. The $171 million-asset bank plans to market the cards to employees of its business customers who do not yet have bank accounts. It will also target the large number of Somali immigrants in St. Paul, who mostly don't have banking relationships, says David Reiling, CEO of the $556 million-asset Sunrise Community Banks, University's holding company.
"We want to use this as the first step on a path to develop a full banking relationship, so they can move on from a prepaid card to savings accounts to a small dollar loan," Reiling says.
University already has half a dozen years of prepaid card experience and is the issuing bank for about 75 different prepaid card programs throughout the country. Reiling says that the bank has about 160,000 active prepaid cards.
The American Bankers Association launched the Community Bank Prepaid Program in October to help banks get into the prepaid card arena. The program allows community banks to offer bank-branded prepaid MasterCards without the cost and infrastructure needed to be a direct card provider, but with more ownership of the card than working through an agent bank.
Response to the program has been overwhelming, with 190 banks in the pipeline just two weeks after the program was introduced, says William Kroll, president of Business Solutions, the ABA subsidiary through which the program is offered.