The prepaid debit card market appears to be one of the few bright spots in the financial services industry.
With pain and trouble all around them, prepaid industry leaders see a window of opportunity that has been thrust open wide by economic conditions and the populist outrage against banks.
Reloadable prepaid cards feel like the right product at the right time. The cards, essentially a checkless checking account, offer an alternative to a traditional bank account on the one hand and the cash economy on the other. This middle ground may be particularly relevant for millions of unbanked and underbanked consumers, whose numbers are swelling as the economy contracts.
Prepaid cards allow consumers to make purchases and pay bills, without carrying large amounts of cash, with the same convenience and near-universal acceptability of a debit or credit card.
Consumers living paycheck to paycheck need immediate access to their funds and cannot afford to wait for a bank to clear a deposited check. Prepaid cards offer immediate liquidity, as consumers can only load "good funds" on them. They are difficult to overdraft, making the cost more predictable and promoting fiscal discipline.
Unlike opening a checking account, purchasing a card does not require a credit check. This will be increasingly critical as financial distress continues to pull down the average consumer's credit scores.
Prepaid industry leaders are optimistic about what this year holds. In a survey conducted by the Center for Financial Services Innovation and Paybefore.com, 70% of respondents said their industry would grow at least as much or more than it did last year.
General-purpose prepaid cards were used for more than $4 billion of transactions last year, according to Mercator Advisory Group, which forecasts that the total will increase to $7.2 billion this year and $10.8 billion next year.
The industry enthusiasm for prepaid cards is echoed by consumers. Two studies of reloadable prepaid card users to be released next month document strong satisfaction with the cards and the value they deliver.
Nearly four-fifths of users found the cards extremely or very useful, according to a survey of underbanked prepaid card users by the CFSI and the Network Branded Prepaid Card Association. Shopping online, making everyday purchases like groceries and paying bills were the most common uses of prepaid cards, and 41% of respondents said they used the cards to keep within a budget.
The most significant benefits of prepaid cards, according to respondents, were the security of the funds if a card is lost or stolen, the convenience of universal acceptance, the ability to avoid overdraft charges and the status that "plastic" confers on users, despite their credit history or past banking experience.
The positive status conveyed by using a Visa- or MasterCard-branded card is a significant part of the appeal of prepaid cards and is a theme the CFSI heard repeatedly from users in a series of in-depth interviews we conducted.
"I could not qualify for a credit card mainstream," one user said. Now that she has a prepaid card, "I can do anything that a person with good credit can do."
Prepaid card users also say the cards and the pricing are easy to understand. Nearly three-fourths of the respondents to the CFSI/NBPCA survey said the fees charged for using their cards were fair. More than half the respondents said they understood the fees perfectly or very well. This is in stark contrast to recent opinion polls about bank fees.
"Every time I was turning around, I was being charged for this, I was being billed for that," another user told the CFSI in an interview. With prepaid cards, "there is none of that," the respondent said. "I know how much I spend a month to have them, and that's all that is."
Still, there are some problems to be worked out, especially in light of recent headlines highlighting dissatisfaction with the prepaid debit cards that numerous states are providing to unemployment benefit recipients instead of a monthly check.
State governments appear to be focused more on cutting check-writing costs than on using the economic crisis as an opportunity to provide benefit recipients access to robust financial services and a platform for stability. The cards they are offering are loaded with transactional fees and offer little value in return, while the general-purpose prepaid market is moving in the opposite direction with declining prices and increasing functionality.
Consumers are not likely to differentiate between state benefit cards and reloadable prepaid cards — nor should we expect them to. The prepaid industry should take seriously consumer concerns and work with state and federal officials to develop a more responsive product. Also critical is ensuring that benefit recipients are properly informed about how the cards work and the potential fees.
If the prepaid card industry can manage this challenge effectively, it may come out looking like a winner — and a trusted partner for consumers.
