Payments Exchange

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Profitable prepaid cards remain mostly elusive, but their potential still glimmers

By Collin Canright

Prepaid card use is soaring, and the checkless account cards are expected to help banks attract millennials and other underbanked customers. As of now, however, prepaid cards are not providing easy money to many community banks.

Worldwide, the prepaid card market is booming. Capgemini’s “World Payments Report 2013” calls it one of the “fastest growing noncash payments markets,” with most growth and adoption coming from the United States. The report points to continued promotion by retailers and a focus on unbanked individuals as two drivers of continued prepaid growth in the U.S. and worldwide.

Javelin Strategy and Research estimates a total value of purchased prepaid cards of $150 billion in 2013, with more than 13 percent of U.S. adults owning a prepaid card. The firm expects overall prepaid purchase volume to grow by almost $45 billion over the next five years.

Despite the rapid increase in overall prepaid markets, growth at community banks has been much more modest. The volume for gift cards, a traditional form of prepaid cards offered by community banks, has nosedived, according to the 2013 ICBA Community Bank Payments Survey. Only 39 percent of community banks now offer prepaid cards, a 40 percent drop over the last four years. Meanwhile, 15 percent of community banks feature general-purpose reloadable cards (GPRs), up 4 percent from 2011. The decline of gift cards is beginning to mark the rise of GPRs, the study concludes.

A changing market

Even so, the opportunity prepaid cards present to community banks is an uncertain one. Community banks appear to be much more sensitive to the dynamics of fees typically charged for prepaid cards. Resistance to higher fees by consumers and the low fees shared by third-party issuers have tempered the prepaid promise for community banks.

Prepaid card issuers have worked to overcome another perception as well: that the primary market lies in unbanked or underbanked individuals. Some recent research seeks to counter that perception. A 2012 Aite Group report distributed by the Network Branded Prepaid Card Association shows that 43 percent of prepaid debit card users are Millennials, and more than 85 percent have checking accounts.

“What do you do with the account that’s called a checking account when your customers don’t write checks? More and more banks will have to face the fact that fewer customers are interested in writing checks.”
—Cary Whaley, ICBA Payments Expert

MasterCard research confirms those results. Nearly half of the market opportunity in prepaid “lies within the general population driven by a new attitude towards money management among banked consumers who are looking to segment their spend on top of their existing payment cards,” according to the company’s “2012 Prepaid Sizing Study.”
That younger consumer population includes yet another market dynamic that prepaid may help manage, as summed up in a question posed by Cary Whaley, ICBA’s vice president, payments and technology policy. “What do you do with the account that’s called a checking account when your customers don’t write checks? More and more banks will have to face the fact that fewer customers are interested in writing checks.”

Millennial moneymaker?

Prepaid is one answer, especially for the digitally-savvy Millennials, the other perennial target for prepaid cards, along with the unbanked. Some banks are attempting to substitute accounts with prepaid cards, with some success. The benefits of complete online access and preset spending limits for budgeting are especially attractive to some younger consumers.

As Whaley says, “They buy prepaid phones. They are not looking at any product that will put them in a cycle of debt. They won’t want to go into the branch.”

The online model has been adopted successfully by Capital One and its 360 product line, which allows consumers to sign up online and use the prepaid accounts for direct deposit, online banking, bill payment and savings. “The most important element of those products will be the smartphone app that supports them and the online access,” Whaley notes.

Initial community bank offerings have focused on general-purpose reloadable cards, but the overall consumer population has not responded well. However, reloadable cards with more focused purposes may have more revenue potential.

First Savings Bank of Perkasie, Pa., started offering prepaid cards about a year ago, attempting to attract both unbanked and younger consumers. However, the bank’s initial offering, a general-purpose reloadable card, fell short with consumers on the fee front. “At least in our area, the general population does not have a lot of demand for that card, and with the fees associated with it, it was not advantageous,” says Todd Hurley, the bank’s executive vice president and chief retail officer.

The greatest prepaid card challenge faced by The First State Bank in Barboursville, W.Va., lies in the low per-card fees available from third-party prepaid issuers, which also keep both the cardholder’s deposit and interchange fees. Meanwhile, the distributing bank is left with the risks and costs of storing cards, doing audits and handling customer complaints.

“If there’s a problem, the customer is going to come back to you,” says Sam Vallandingham, First State Bank’s president and CEO, who also serves as chairman of the ICBA’s Bank Operations and Payments Committee. “You are the one they know, and you will spend the time and effort making it right. How does this make business sense?”

For The First State Bank, it doesn’t make sense, at least not yet. “We want to get into the market,” Vallandingham says. “We just haven’t been able to make the business case work.”

Focused offers

Indeed, community banks that have done well with prepaid cards generally have created prepaid products to serve large companies, either for their customers or, more often, their employees. The general-purpose reloadable card does not have to be general purpose.

In the case of First Savings Bank of Perkasie, the bank’s prepaid issuer is retooling to offer special-purpose prepaid cards, instead of a general-purpose card. Targeted offers for students, online payment and travel are in the works. MasterCard’s research, for one, shows travel cards as the top future product, followed by health care cards.
Another likely prepaid card market for community banks is the corporate market, for both payroll and travel-and-expense cards. “Community banks need to have products available to compete with larger banks for the treasury management business of larger companies,” says Terry Maher, general counsel for the Network Branded Prepaid Card Association in Montvale, N.J.

A good number of large banks started offering prepaid corporate cards as an add-on to their treasury management services, enabling companies to better budget and track incidental and travel expenses. Community banks are seeking to follow the same model, with a focus on payroll or health care savings cards for large employers.

In the end, however, fees likely will remain a primary profit driver of the prepaid market. As Capgemini notes in its payments report, “The growing trend to impose legal limits on debit card interchange fees is likely to mean that prepaid cards will continue to grow at a faster rate than debit cards.”

For community banks, the fee conversation will remain more personal. “We are changing the fee structure so it’s not as expensive to the user,” says Herley, of First Savings Bank of Perkasie. “We’re hopeful that by doing this, the cards will meet the needs of specific customers.”


Collin Canright is a writer in Illinois.

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