Has Prepaid Become a Victim of Its Own Success?

As the prepaid card market has matured, it has become a “business not for the faint of heart or haphazard investor” because of regulatory scrutiny and competition’s effect on pricing, according to Aite Group.

Even worse, if regulators cut fees for prepaid products or lower interchange rates, “the prepaid market will disappear,” says Aite analyst Madeline Aufseeser.

Because the prepaid market has reached a mass-market audience through products like American Express Serve and Bluebird cards and the Chase Liquid card, it no longer targets only underbanked consumers, Aufseeser says.

“The implications are loud and clear that price compression, mostly from American Express coming into the market, is causing a further drop in revenue,” Aufseeser adds.

It leaves prepaid card issuers, especially those in retail channels such as Green Dot, looking at an uncertain future. “If you can’t scale back, you can’t survive,” Aufseeser says.

Aufseeser and fellow analyst Ron Shevlin compiled the November report on prepaid debit cards, focusing on cardholder demographics and revenue models. Boston-based Aite Group conducted a survey of more than 1,200 U.S. consumers to represent all age, income and geographic regions during the second quarter of 2013.

The report did not examine operating costs, acquisition or marketing expenses associated with a prepaid debit card portfolio, but surmised that revenue generated on a per account basis is small compared to credit cards or other financial services products.

In the world of prepaid card mathematics, virtually all players in the market share about 1% of each dollar built through prepaid card loads, the report states.

“The revenue models say that an industry that loads $65 billion onto cards, as it will in 2013, would result in $650 million for all of the players to share,” Aufseeser says.

If that revenue were to fall even lower, even Green Dot, the biggest player in the retail market, would be facing a rough road ahead, Aufseeser adds.

After its third-quarter profits fell 36%, Green Dot Corp. announced last month it would expand its Walmart prepaid card portfolio. Last week, the company received Federal Reserve Board approval to buy GE Capital’s Walmart-branded prepaid debit card business, a move that would double Green Dot’s total deposits.

“These companies are going to have to cut out the middle man in the business” to trim expenses, Aufseeser says. “Program managers will go away.”

In order to drive revenue, providers should focus on getting cardholders to use prepaid debit for purchases at the point of sale, because interchange income represents more than 50% of revenue generated through heavily active cardholders, compared to 20% for light users, the report states. As such, providers need to convert “one and done” or anonymous cardholders to using prepaid cards at the point of sale more consistently.

Prepaid card issuers also need to invest in lobbying activities and industry efforts to preserve interchange rates at higher levels and preclude regulatory initiatives, the report suggests.

The prepaid market has shifted from innovators and startups working on technology to big payments industry players entering the arena, Aufseeser says.

“We are seeing a real tipping point with this market,” she adds. “But you expect this to happen when a market matures.”