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Unanswered Questions about Prepaid Cards

Adam R.'s picture

Posted September 6, 2013

Although there are several firms providing regular research about the use of prepaid debit cards (NBPCA, Javelin, CFSI, Pew, Mercator, Aite), plenty of things remain unanswered. Views about prepaid diverge widely and even informed perspectives recognize that what was true a year ago is probably less so today. Card use

is increasing, the products are adding functionality, costs are dropping, and laws are evolving.

What is left to know?

Demographics

Crosstabbing prepaid usage with take-up rates of other financial products: We know that a fair amount of prepaid card users have checking accounts, but what share have credit cards? How many have secured cards? How many use payday loans? How many have mortgages? What about the share that still have their checks cashed somewhere?  How do all of those statistics change when you control for the people that put a recurring direct deposit on to their card? The check cashing question will be clarified, at least to some extent, by Green Dot's partnerships in those stores.

Value proposition versus checking: To an extent, the only thing we know about why people prefer prepaid is that they have had some bad experience with their checking account. We know that being overdrafted is a bad experience. But that really narrates the person who leaves prepaid for checking. What about the ones that keep their feet in both? Specifically, what about the ones that direct to deposit onto prepaid and use the checking account as a secondary tool. Why?

Age: You often hear that young people like prepaid cards. Well, how many of them prefer mobile banking to prepaid? Is the future really that bright for prepaid if 18-29 year-olds find them attractive, or will they drop those cards as soon as they get more comfortable with apps? Conversely, now that more seniors are using DirectExpress, will it be the case that those folks suddenly emerge as a market opportunity for mainstream cards? Could old people be the real growth opportunity in prepaid?

Immigration: The FDIC's demographic data covers race, geography, and income. But that is for the unbanked and underbanked. So far, all of the research from industry has ignored the first and been fairly silent on the second. The FDIC says that there are higher rates of unbanked and underbanked within the African-American and Latino communities. Once you shift to prepaid, how do those numbers change? What is the chance that Latino usage of prepaid cards is actually not very high? I very much doubt that it rivals that of African-Americans, mainly because they tend to exhibit different employment patterns. We can only guess for now. 

Purses: I often hear that plenty of people like to use prepaid cards for special purposes; for a vacation, to send their teenager off to college, or to establish a savings account for a relative. Fine, but do we really care? Altneratively, does anyone really want that business? Aren't those all money losing propositions? How do you make up the cost of customer acquisition?

Beyond Demographics

What is next for credit? If a dedicated line of credit on a prepaid card is dead, can the same be said for credit products that can be distributed and repaid on prepaid cards. The answer to that is "no." But what happens if a program manager jumps on that gap to market a consumer installment loan to their prepaid card holders?  Even if every one knew that only prepaid card holders were using the installment loan, any PM could hide behind the fact that the line would still be available to others.

Functionality: Is the load going to vanish? Direct deposit use is growing, but the other possibility is that the kiosk platform will explode. Will those pre-authorized checks really work out? Will more advocates drop their insistence upon free paper statements?

New players: The day is coming when phone companies go beyond being merely bit players in payments. But that is a known unknown. When does McDonald's go beyond a few gift cards and suddenly partner with an issuer to offer a prepaid card in their stores? Can you imagine if you could "load" a prepaid card at the lunch counter?

Fee-free ATMs: How many people actually use those fee-free networks? Do people avail themselves more of fee-free ATMs when they have a prepaid card with a branch bank (Chase Liquid, BB&T, et al)? I would like some specific percentages. I expect that the share of fee-free visits is still fairly low. Moreover, among those that don't go to fee-free ATMs, how many manage to use the point-of-sale as a means to get cash?

Savings accounts: When will we find a "special sauce" that convinces people to use prepaid cards to spend while simultaneously putting money away on their savings sub-account? High interest is not working.

Versus cash: Dan Henry says that prepaid is not a rival to checking, but instead to cash.  Will prepaid remain the best alternative to cash in the future? Does it have to now beat phones - and if so, is it more vulnerable to mobile payments than is the case with a checking account?

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