Banks may be taking a big risk in letting younger consumers get too comfortable using prepaid cards for most financial services.
As the percentage of consumers using reloadable prepaid cards rises and the use of checking accounts for routine financial services drops, nonbank prepaid card issuers are competing directly with banks for younger consumers' long-term loyalty, new data from Javelin Strategy & Research suggest.
In an online survey involving 3,210 U.S. adult consumers Javelin conducted in October, the firm found the percentage of participants using prepaid cards–one of the few financial-service products gaining market share–climbed to 13% from 11% in 2010.
Moreover, the percentage of consumers that said they had a checking account declined to 88% from 92%, Javelin data show.
Young adults are among those most likely to use a reloadable prepaid card, and a growing number of them are at risk for sticking with a nonbank card provider instead of eventually gravitating toward using a bank for most of their financial services, Javelin warns in a report issued earlier this month.
One factor accelerating that potential trend is a gap in banking services for young adults that opened when the Credit Card Accountability, Responsibility and Disclosure Act went into effect in 2010, Beth Robertson, Javelin research director and the report's author, tells PaymentsSource.
The CARD Act placed limits on issuers' ability to market credit cards to students by requiring borrowers younger than 21 to have a cosigner or demonstrate an ability to repay loans. It also prohibited issuers from offering free gifts to students for submitting a card application on or near a school campus, thus driving some banks away from targeting younger consumers with card offers (
When the law took effect, "it limited banks' ability to market credit cards to students and, as a result, prepaid cards began to offer people under age 21 the flexibility they might have had with a credit card they were no longer eligible for," Robertson says.
Simultaneously, banks began hiking checking-account fees to offset revenue losses from other channels. One of those channels was debit card interchange, which essentially was halved by a Federal Reserve rule resulting from the Durbin amendment to the Dodd-Frank Act, Robertson contends. As a result, many younger consumers switched to using reloadable prepaid cards, which are more immediately accessible and, in some cases, cheaper than checking accounts.
Some 18% of "underbanked" adults, or those without a checking account, now have a prepaid card, Javelin's survey data suggest. Lower-income consumers are more likely to own a prepaid card, with 17% of those earning less than $15,000 annually reporting they had one compared with 13% of all respondents who did, the firm said.
Younger consumers also are more likely to own a prepaid card, including 18% of "Generation Y," or those consumers born after 1979, Javelin’s data suggest. That compares with 13% of respondents of all ages who had a prepaid card, according to the survey report.
Online shopping and bill payment are popular features for prepaid cardholders, Robertson says.
More than half, or 56%, of underbanked prepaid cardholders who respondents to the survey said they regularly used their cards for online purchases compared with 46% of all prepaid cardholders surveyed, Javelin data suggest.
Most prepaid cardholders reload their card accounts more than twice a month, and that takes place most often at an outlet that is not a bank, Javelin’s data suggest.
Of all prepaid cardholders responding, 67% had a reloadable card, and on average they paid a fee of $1.96 for each funds reload. More than one-third, or 36%, of cardholder respondents reloaded their cards once per month, while 26% reloaded twice a month, 27% reloaded more than twice a month, and 11% never reloaded their cards, Javelin said.
Almost half of prepaid cardholders reload their cards online, while 44% also reload cards at a merchant location, 27% do so at a money-services provider such as Western Union, 23% reload at a bank branch, and 17% use an ATM or kiosk, Javelin’s data suggest.
Because prepaid cards may function as transitional tools for young adults learning how to manage their finances before leveraging mainstream banking services, such as credit cards and mortgage loans, banks should pay close attention to young consumers' prepaid card use to woo them for future services, Robertson suggests.
"It is to financial institutions' advantage to seek out these young consumers at the earliest stage" to market banking services to them, Robertson advises.
Some three-quarters, or 76%, of respondents said a bank had never offered them a prepaid card, while 24% said a bank had done so.
"Young adults are using prepaid cards in higher numbers than ever before, and banks ought to be studying their usage in order to consider how it will complement or augment bank products these consumers may eventually use," Robertson says. "Banks that want to eventually win over these consumers should keep a close eye on this market."
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