Prepaid card usage trends and debit-driven regulatory change mean that the prepaid industry has the wind at its back. In its just-released report on Prepaid and Gift Cards in the U.S., Packaged Facts estimates that prepaid card payment volume will rise 22.4 percent in 2012 to $247.5 billion, up from $202.2 billion in 2011, on the strength of almost 10 billion transactions.

Continued growth, however, will depend on navigating cross-currents of challenges and opportunities. How will the industry approach consumers’ banking dissatisfaction and distrust issues? Can the industry strike a balance between checking account profits and migration to prepaid programs? How can it increase prepaid cardholder retention, defuse lingering overdraft issues, harness card platforms to best meet the needs of the unbanked and underbanked, and leverage younger consumers’ financial positions while building relationships with them?

According to David Sprinkle, publisher of Packaged Facts, consumers dissatisfied with their consumer banking experience are natural targets for emerging prepaid programs. If given a prepaid card product functions much like a checking account but without the fees, consumers disgruntled with fees and practices applied by their banks may very well try it.

And Packaged Facts’ analysis shows that distrust of banks is rising among groups that are leading prepaid card candidates: Gen Y, lower-income adults, and unbanked/underbanked Hispanics.  (Frustration cuts both ways: many banks are using prepaid cards to shed lower-income consumer checking customers, raising public policy issues.) 

Even so, a major challenge for prepaid card issuers is the high rate of product abandonment, combined with the high rate of retention of banking and checking accounts. One way to increase prepaid card retention and drive usage may be to link the cards to direct deposit.

Prepaid debit cards are positioned as an attractive alternative to traditional bank accounts for certain segments of the population, particularly those without a checking or savings account and those reliant on alternative financial services such as non-bank money orders, check cashing, rent-to-own agreements and payday loans.

As a result of their lack of access to traditional bank services, many of these consumers have historically used cash as their primary payment vehicle. However, the reliance on cash inherently limits these consumers' purchasing power and flexibility. For this portion of the population, prepaid debit cards have emerged as an attractive alternative to cash, allowing a cardholder to participate in mainstream financial transactions by other means.

In addition, prepaid cards can suit the special niche of young adults, who may appreciate having a financial services product for which they can qualify and which can meet their relatively narrow financial service needs. The industry is working to find ways to generate profits not only from the prepaid programs themselves, but from the further development of relationships with these consumers over time.

Consumer Trends, Finance, News