Consumers ages 30 to 50 increasingly are using reloadable prepaid debit cards, and the trend might be enough evidence for banks to offer such products to recoup anticipated reductions in revenue from new, reduced debit card interchange rates, new research suggests.
In a December online survey of 1,011 U.S. consumers, Aite Group LLC found that 35% of Generation Y consumers–those generally born after 1980–had used a prepaid card to make a purchase during last year’s fourth quarter, while 30% of Generation X consumers born in the 1960s and 1970s also had done so.
Aite believes banks could benefit from targeting such consumers for prepaid products.
“Compared to the percentage of the overall population that these two generations comprise, they represent a disproportionately high percentage of the demand for new banking products,” Ron Shevlin, Aite senior analyst and the report’s author, wrote in the report. Shevlin was not immediately available for comment.
Reloadable debit cards are a possible alternative to traditional debit cards for banks because they are exempt from the so-called Durbin amendment in the Dodd-Frank Wall Street Reform and Consumer Protection Act (
Some banks already have cut debit rewards and have raised checking account monthly maintenance fees to offset potential lost revenue from the proposed changes (
Banks introducing prepaid cards as primary payment cards likely would avoid unwanted customer behavior resulting from new debit and checking account fees, Aite concludes. “Discouraging the use of debit cards among checking-account holders, for example, will result in the increase in the use of checks, cash and/or credit cards,” Shevlin writes.
For most banks, only a small percentage of their checking account customers also have one or more of the institution’s credit cards, meaning they do not have the ability to try to shift them to using their credit cards to make up for the lost debit card interchange revenue.
Moreover, checks generate no interchange revenue and cost more to process than do card-based transactions. And consumers using more cash would have less interaction with their banks, as it “reverses the trend of increased engagement between banks and customers that banks have seen as the result of card usage and online-account management,” Shevlin writes.
Aite recommends banks concentrate on three areas when introducing prepaid cards to it customers: segment customers based on card-based transaction volume, limit fees to the “moderate-transactor” segment and bundle prepaid cards with checking account options to start changing customer behavior.
Banks can recoup 20% of anticipated lost debit interchange by marketing prepaid cards to their customers, Aite suggests. Most of the recouped costs would come from customers in the “high-transactor” segment, which averaged 56 debit card transactions during the fourth quarter. Banks also should not charge prepaid card fees to these users, as those customers already had shown willingness to shifting their payment preferences from credit to debit over the years, the report says.
When banks are ready to introduce prepaid card fees, they should limit them to the “moderate-transactor” segment, the report suggests. Moderate transactors conducted some 14-debit card transactions during the fourth quarter 2010.
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