Prepaid card companies are making it possible to have the benefits of a bank account without actually having a bank account.
A growing number of prepaid companies are introducing features, such as online banking and bill pay, savings accounts and even lines of credit, that observers say are making card accounts seem more like basic checking accounts.
Executives say their products make it easier for the underbanked to stay away from banks and may even drive banks to expand their prepaid offerings.
However, analysts say banks will always have a marketing advantage, and adding advanced capabilities to prepaid cards might prompt some people to visit a branch, where these features — and more — are standard offerings.
Hamed Shahbazi, the chairman and chief executive of Tio Networks Corp., said many people who avoid banks still want access to modern financial services, and prepaid cards can meet those needs.
"The underbanked, from a financial perspective, aren't suffering from a digital divide," Shahbazi said in an interview Wednesday. "Those are two very different issues."
Tio, of Vancouver, said Wednesday that it would add its online bill-pay capabilities to prepaid payroll cards offered by First Data Corp.
The Houston processor FSV Payment Systems Inc. has also found there is demand among the underbanked for banking services, especially among users of its payroll cards.
Jonathan Palmer, FSV's president and CEO, said "it's not that they don't want a bank account or they don't want bank services … different people in this country regard banks differently — some don't trust banks."
"Our customers realize, as we make them aware, that they have access to a full array of financial services," Palmer said. This allows someone with a payroll card "to get into the mainstream of financial services."
FSV offers several prepaid products with features more commonly seen at banks, including online banking, bill pay, checks, savings accounts and lines of credit.
Aaron McPherson, a research manager for payments at IDC Financial Insights, said "the line is kind of blurring" between prepaid cards and conventional bank cards. Today's prepaid cards "should be seen as a variety of a debit card."
But while the features are similar, Palmer said prepaid cardholders differ from the average bank customer in the ways they use these financial services.
"Many don't use the savings account as you or I might," he said. Whereas banked consumers might have an emergency fund or save for long-term goals such as a home or retirement, the unbanked have more immediate savings needs.
"Many people at their socio-economic levels need to put money away for a special purpose," such as to pay the rent at the end of the month, he said. Without a savings account, these consumers use more cumbersome ways to hold on to their funds, such buying a money order and stashing it away until the end of the month.
And the line of credit offered on some FSV cards is "a much more efficient and a much less expensive way to borrow small sums of money than … small loan companies, payday lenders," Palmer said. "What we're giving people is the ability to manage their finances."
Other prepaid card companies have been moving in the same direction.
Last year NetSpend Corp. announced online budgeting tools similar to what banks offer as personal financial management. Plastyc Inc.'s iBankUP card allows users to have checks issued from the balance on their prepaid cards.
Shahbazi said that prepaid card providers face many of the same challenges as banks, and that offering new features can help them retain customers.
With payroll cards, for example, "it's not like these employees are always going to remain with that employer," Shahbazi said, and leaving a job often means leaving behind the payroll card that came with it. "There's going to be a lot of churn with these cardholders … bill pay is a fantastic way to retain that customer."
Representatives of First Data, a Kohlberg Kravis Roberts & Co. unit, would not make executives available Wednesday.
Though many of these advanced-feature prepaid products are payroll cards, other prepaid products are being used in novel ways.
Discover Financial Services offers a prepaid card, Current, that was designed for parents to give to their teenagers but in some cases is being used to help manage other types of household spending, much like a small-business credit card.
"We have seen instances where parents have opted to give the Current Card to their nannies," a Discover spokeswoman said by e-mail. "Others have provided it to elderly parents who are in their care."
McPherson is one of them. "I use it for my son's nanny," he said. "She takes him out to do things and needs a source of money to do that. She had just been using our personal credit card, but I was a little uncomfortable with that," so McPherson switched to Current.
And just as prepaid cards are becoming more banklike, banks may have to become more like prepaid companies to reach this audience. "My expectation going forward is that more banks will employ prepaid technology to help them deliver a full range of financial services more efficiently than they can today," Palmer said.
McPherson said that while prepaid cards are becoming more useful, "a bank does have a real advantage" in winning customers.
Prepaid cards are typically sold online or at retail stores, but banks "have branches, they have sales channels," and can use them to meet customers' needs, he said.