Wading into the Prepaid Waters

Big retailers are making a splash in consumer prepaid cards. Should community banks dive into the same payment pool?

By Viveca Y. Ware

It’s unusual for prepaid to be a focal point in back-to-back payments columns, as it was in March and now is in April. But Facebook’s foray into branded gift cards, on the heels of the Wal-Mart/American Express Bluebird card announcement, provides strong evidence of the growing appeal of prepaid. In fact, interest in prepaid has been growing steadily for some time, spiking 20 percent in 2011 to $483 billion value in transactions made, and is expected to continue to climb through 2013, reaching an estimated $648 billion value in transactions by 2014, according to the Mercator Advisory Group.

Like Wal-Mart, Facebook has a large customer base, with the potential to produce economies of scale to make a consumer prepaid option—even a closed-loop one—lucrative. But size or lack thereof should not preclude community banks from dipping their toe in the consumer prepaid market and jumping head first into the more lucrative commercial prepaid waters.

Not only can prepaid cards help community banks serve segments that, for whatever reason, do not have a traditional checking account (an estimated 60 million people), but prepaid also can help replace diminished revenue as a result of checking account fee restrictions and the impact of the Durbin amendment’s debit card pricing limits.

Additionally, it’s a way to cheaply build up a bank’s deposit base and even penetrate deeper into its existing customer base. Some customers, for example, are using prepaid as a way to provide a secure amount of money to a nanny, college-age kids or even individuals caring for aging parents.

The corporate connection

There’s an even bigger impetus for offering a prepaid card option to commercial customers, explains Kirsten Trusco, president of the Network Branded Prepaid Card Association (NBPCA), a nonprofit, inter-industry trade association tasked with raising awareness of prepaid cards issued by financial institutions.

Not only does the prepaid product have proven stickiness with customers seeking a more efficient way to process recurring payments, but there’s also the additional interchange income generated for the issuing bank. Take a workers’ compensation claim, offers Trusco. Rather than issue four to six checks for an injured employee, the employer could provide a reloadable prepaid card for what would be the equivalent of an ACH fee, and the bank would also earn interchange fee income as the workers’ compensation beneficiary starts drawing funds off the card.

Moreover, the card can be used anywhere that the card network’s brand is accepted, including, in many cases, at the ATM to get cash back. The employee doesn’t need to make a trip to the bank branch to cash or deposit a check—a time-saver for the customer—and the bank brand gets additional exposure every time the customer pulls out the plastic, Trusco notes.

Prepaid offerings are also an attractive option for corporate customers that can’t afford to pay out big bonuses but would still like to recognize their employees’ contributions with a network-branded gift card, and for small businesses that have employee travel expenses to cover but prefer a preset limit alternative to a revolving corporate expense card.

New and improved product

Despite their reported advantages, some community banks have been reluctant to push forward with prepaid offerings, citing regulatory requirements and an overall lack of resources to bring these products to market, explains Terry Maher, corporate counsel at the NBPCA. After all, these are bank products for which the agencies expect a certain level of control and oversight (see OCC Guidance: Bulletin 2011-27) and a full understanding of the potential reputational risk and fraud risk associated, he notes.

While some community banks have the wherewithal to develop and oversee their own programs, a number of vendors (including core processors) have entered this space with turnkey prepaid solutions, giving those reluctant to take on the additional risk an agent issuing option complete with training, marketing and customer service support, Maher explains.

Highly publicized announcements like those by Facebook and Wal-Mart have certainly raised the profile of prepaid, and speak to a growing market for such products, particularly as traditional products fall out of favor (due to changing payment preferences, decreased benefits or increased fees).

They also illustrate the ongoing effort by alternative financial services retailers to entice customers away from bank-issued payment instruments—be they check, credit or debit cards—in lieu of a new payment experience where banks are forced to wade in the kiddie pool. endmark

Viveca Y. Ware is ICBA senior vice president for regulatory policy.