A Prepaid Draw To Banking

  Millions of unbanked and underbanked consumers have at best a tenuous connection to a depository. Without access to debit and credit cards, they are stuck in the cash economy, unable to participate in the opportunities electronic payments present. Likewise, financial institutions wedded to the traditional checking account as an organizing principle have been unable to make profitable inroads into what has become a very large consumer demographic.
  Stored-value cards offer a solution: a fresh approach to customer acquisition and a platform to provide a broad range of financial products and services.
  Of all the stored-value cards on the market, general-purpose cards offer the greatest potential. Consumers can load funds on the cards and make purchases in a variety of ways and locations. They can withdraw cash or pay bills, and have funds directly debited on a recurring basis. Consumers also can send funds to recipients around the globe by providing them with a second card to access the money as needed.
  While still small overall, the stored-value card market has mushroomed in the last few years. Nearly $160 billion was loaded onto all prepaid products in 2004, according to Mercator Advisory Group. While general-purpose cards accounted for only $2 billion, the category experienced 100% year-on-year growth.
  The evidence, primarily qualitative to date, is that one of the biggest users of general-purpose stored-value cards are unbanked and underbanked consumers, particularly those unable to qualify for a credit card. The appeal of stored-value cards is they generally lack the identification and credit requirements that effectively bar millions of individuals from opening traditional bank accounts.
  Also, the cards can be purchased and reloaded at a growing number of locations other than bank branches, such as check cashers, convenience stores and other retailers, an appealing option for customers who are motivated by comfort or convenience. Card funds also are available immediately, an important consideration given that underbanked consumers are more likely to live from one paycheck to the next.
  Moreover, the prepaid cards are more difficult to overdraft, which means few unexpected fees. Underbanked consumers generally prefer to know about and pay for fees up front, and they are willing to pay a premium for fee transparency. But they also have aspirations of greater financial prosperity, and having a branded card speaks to that desire.
  So far, alternative providers have taken the lead in developing general-purpose card programs aimed at underbanked consumers. Aside from some efforts around payroll and gift card programs, most banks continue to sit on the sidelines as they sort out which of the various card roles-issuer, marketer, processor-they want to play.
  Most cards do not provide a platform for saving or accessing credit. A handful of providers are developing linkages between the cards and credit products, and earlier this year NetSpend launched an interest-bearing, FDIC-insured savings feature on its cards in partnership with its issuer, Inter National Bank. But they are the exception.
  To fulfill the promise of stored-value cards as a way to tap new markets, banks and alternative providers should work together. They should develop a broader set of features that simultaneously extend card use in the short term while preparing consumers to take advantage of cross-sell opportunities in the long term. Only then will stored-value cards gain credibility as a legitimate product with the potential to activate the next generation of financial-services customers.
  Jennifer Tescher is the director of The Center for Financial Services Innovation, a ShoreBank Advisory Services unit in Chicago that helps financial companies bring the underbanked into the banking system. She can be reached at jtescher cfsinnovation.com.
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