As new legislation and economic issues tighten available credit lines, more and more consumers are turning to network-branded reloadable prepaid debit and payroll cards as alternative payment methods to credit cards and cash, new research suggests.
Boston-based Aite Group LLC conducted the research earlier this summer by analyzing 2009 data from issuers of prepaid debit and payroll cards and discussions with about 60 payment industry executives. Its findings suggest that by 2014, funds loaded into prepaid debit and payroll card accounts will increase to $164 million from $44 billion last year.
Broken out, prepaid debit card account loads will increase to $104 billion from $25 billion, while funds loaded into payroll card accounts will grow to $60 billion from $19 billion, the company’s research suggests.
The number of prepaid debit card users also will double, to 7 million from 3.5 million, and the number of payroll card users will grow to 5.4 million from 1.7 million, Aite predicts. Based on these figures, Aite estimates the combined number of prepaid debit and payroll card users will reach 12.4 million in 2014, up from 5.2 million last year.
Of the combined prepaid debit and payroll card users studied, 28% last year used their cards as an alternative to bank accounts, while 72% used them as a temporary alternative to using cash or checks, Aite says.
The combined active users of prepaid debit and payroll cards will account for about 25% of the U.S. unbanked and underbanked population by 2014, up from 11% in 2009, the research also suggests. Active prepaid debit cardholders will account for 14% of that same population, up from 8% in 2009, while active payroll card users will account for 11%, up from 4%, Aite predicts.
And as banks and credit unions decline more consumers requesting a checking or a credit card account, they will begin to offer them in the next few years prepaid debit cards as a “second-chance” card instead of turning them way, Gwenn Bézard, Aite research director, tells PaymentsSource. Additionally, issuing prepaid cards can help banks “better serve the low end of the customer pool,” he says.
Banks also may benefit because prepaid cards are less expensive to manager than checking accounts. And now that banks have to limit overdraft fees, it is more costly to offer free checking accounts, Bézard notes. Moreover, for consumers who cannot afford a fee-based checking account, a prepaid debit card is the next-best option, he explains.
The research also suggests that both prepaid card segments will remain unaffected from recent legislation. Large banks, however, with more than $10 million in assets, may be affected because “debit portfolios are targeted for a reduction in interchange,” Aite says. If Issuers of prepaid debit and payroll cards such as NetSpend Corp. charge overdraft fees, they no longer would be exempt from interchange regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Bézard says.
Despite these challenges, prepaid debit and payroll cards offer financial institutions an opportunity to reach a wide range of customers and to offer an alternative payment option to customers on a budget, Bézard says.
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