As a fairly unitary tool for payments, a prepaid card functions more like a utility than a transformative product. It it a tool that lacks any connection to a mission, even if it does elevate a formerly-cashed person's status in the financial world.
For better or worse, a prepaid card is decidedly not engaging. In pop philosopher Marshall
McLuhan's lexicon, the prepaid card is very "cool." (Reading is hot, television is cool; one requires imagination while the other does all the work for you.) Although some outliers do offer unique services, for the most part they differ only by their combination of price and functionality. Provided that the consumer is rational and informed, he or she looks for a card whose price/function combination matches their needs the best. There is not much in the way of brand loyalty. Given that absence, providers spend lots of money on advertising, lead generation and retail product placement. The sizzle is unique, but the steak is generally the same.
But it really does not have to be that way. In fact, prepaid cards are poised to seize transformational turf. To do that, however, the cards have to expand their offerings. Doing so will not double their market share by any means, but if properly done it could allow program managers to add a good slice of additional customers. It is also likely that these new offerings, which I will mention next, could add excitement and loyalty.
I think that the development of a better savings account and the introduction of an effective credit builder could be the best opportunities for transformation. Both fit all of the criteria for transforming lives: they offer the opportunity to help a person realize a mission that changes more than their ability to pay for something, they will require a two-way engagement on the part of the product and its user in order to deliver, and if successful they will induce people to pass on their experience to others.
Very few Americans - not just the unbanked and underbanked - are saving enough. Just this week, there is a new study out from the National Institute on Retirement Security which says that the "typical" household nearing retirement age has only saved $12,000.
Having savings is a transformational experience. With savings, person is empowered to look at the world differently. A nest egg can support dreams, such as buying a house or putting a child through school. It also serves as a protective barrier against a crisis.
Virtually anyone that can qualify for a prepaid card can get a savings account at a traditional branch bank. Banks do not qualify people for savings nearly as much as they do for checking. Even someone who is listed on ChexSystems can get a savings account. But having your savings on an account in a branch, untethered to a spend account, is hardly satisfying. For folks that spend via a prepaid card, attaching a savings account is a far more satisfying option.
Moreover, a good savings account probably needs to be more than just a receptacle for extra dollars. The new new ideas in savings all involve an interface (mobile or traditional internet) that engages individuals. They preach about budgeting, buying less, and goal-setting. The behavioral approaches out there (PiggyMojo, Plastyc, D2D) all tap on two-way dynamics to foster success. Needless to say, for those that can realize savings through those products, they will spread the word to their friends.
Just like savings, building credit is transformative. You can be on a mission to build credit. In fact, you probably have to work hard to do it. The reward is big, though. For many people, restoring or establishing their credit score changes their context in life. Suddenly, all kinds of things are within reach. Building credit is not easy, either. Most pre-purchase housing counselors spend months working with their clients to rehabilitate their credit so that they can buy a home.
No prepaid card has yet found a credit building product that worked very well. New ideas (eCredable, maybe WilliamPaid) are percolating. The first mover here could establish a firm moat.
So who will give a new transformative product a try?
There is something called diffusion of innovation theory which describes how a new idea gains acceptance. This started with the Iowa Hybrid Seed Study back in the 30s. According to one of those academics, the population breaks into these segments: innovators (2.5 percent); early adopters (13.5 percent), early majority (34 percent), late majority (34 percent), and laggards (16 percent). So, this means that you cannot achieve mass market success until you reach a tipping point -- past the early adopters.
Right now, the best behavioral savings products report that about ten percent of their "spenders" are also savers. They are getting the innovators and a good share of early adopters. They are getting closer to the fat returns offered by the majority, but they still aren't there. For any outsider seeking to judge the value proposition afforded by savings, this is important to realize. There are plenty of naysayers that believe that underbanked/unbanked folks cannot save. These products hint that this is not true.