Bank Board Letter — June 2015
PREPAID CARDS: WHAT WAS ALTERNATIVE HAS GONE MAINSTREAM
Kari Mitchum


Picture it. You’re shopping in the grocery store and a Dave Matthews song is played over the speakers. You start singing along. “I love this song,” you think to yourself. Then you think, “Wait. This alternative music that I listened to in college; why is it being played in a grocery store?” Then you realize that college was 25 years ago. What is alternative eventually goes mainstream.

The same can be said about payments. Prepaid cards used to be perceived as an item for the unbanked and underbanked. (The use of “prepaid cards” in this article refers to general purpose reloadable cards that carry major network brands, such as MasterCard, Visa or American Express.) In reality, prepaid cardholders look more and more like the general population. The average prepaid card user is between the ages of 30 and 40 and has a household income of over $50,000. What was once an alternative payment method is clearly now mainstream.

PAY FOR WHAT YOU GET
Most banks offer giftcards as a convenience item in the branch, so for the two times a year the average consumer visits a bank branch, that bank is ready for the impulse purchase. If banks want to be successful in prepaid, they must pay attention to the mix of prepaid products that they offer and include not only giftcards but also payroll and reloadable cards. Four Corners Community Bank in Farmington, N.M., shifted its product mix and saw its interchange income quadruple, even though the total number of cards outstanding declined.

Banks are facing tough competition from the likes of Walmart’s Bluebird product and GoBank. Marketing collateral for these alternative banking providers features the technology behind the card versus traditional bank marketing, which focuses on the consumer. Banks that are successful with prepaid must integrate both messages Ð technology and the consumer. Successful banks don’t offer checking accounts and prepaid accounts; they simply offer accounts, and the prepaid solution is in the same grid as the senior checking product (the use of word “checking account” for a financial product that barely has any checks written on it is fodder for another article).

CRASH INTO ME
Every generation has an economic event that changes its behavior. For millennials, the recent recession, Credit CARD Act and the tightening of lending criteria have greatly affected how they bank. According to the FDIC, only 67 percent of households in the United States are fully banked, and the homeownership rate is currently at 64 percent. As a result, millennials have adopted the use of prepaid cards at rates higher than other generational groups.

In addition, the Federal Reserve Bank of Philadelphia found that millennials are using prepaid cards more times a month and with a higher average of spending versus other age segments (see table on page 2). Millennials are incorporating reloadable prepaid products into the mix of products that they use. Frequently, prepaid products are being used as a budgeting tool, taking the place of an old-school envelope system. Sometimes they are even being used to fund online shopping.

COULD I HAVE BEEN?
Many millennials are using prepaid products the same way older generations used a checking account. How can you tell the difference when comparing a DDA “check card” to a prepaid card? Both need to have funds before you can swipe them. Both allow purchases anywhere a major network is accepted. Most important, both allow online usage. Consumers can fund a PayPal account or their Starbucks mobile app. From a consumer’s usability standpoint, there really is no difference between a DDA check card and a prepaid card. However, there is. The consumer doesn’t need to pass a credit check or have a clean financial history to get a prepaid card. Of course, just because millennials use one alternative product doesn’t mean that they eschew traditional banking products. According to the Federal Reserve Bank of Philadelphia, 90 percent of people who own a reloadable prepaid product also have a traditional checking account.

So Much to Say
When anything is new, it is called alternative. But just like our favorite bands from college, the good ones stick around and become mainstream. Prepaid cards are at that point now. Prepaid products are not just for the unbanked and underbanked. They are being widely used by millennials as part of their financial product mix. Banks need to incorporate prepaid into their product offerings if they want to fully serve this group of adults as they enter their peak banking years.

Kari Mitchum is the senior director of payments solutions at the American Bankers Association. Contact her at kmitchum@aba.com.
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