Durbin, CARD Act, more push shut-out consumers towards prepaid channel

 

Financial institutions can supplement traditional account services by using prepaid cards as a tool to help consumers establish financial services access and move toward more mainstream financial relationships, according to a Javelin Strategy & Research report.

The report outlines increasing opportunities, created by recent economic upheaval and new banking regulations.

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This intersection of regulatory and economic factors has caused many consumers to no longer be eligible for some payment mechanisms. Further, regulations such as the Durbin Amendment, the CARD Act of 2009, and Regulation E are limiting or have the potential to limit the revenue collected from traditional payment options, encouraging a shift in direct deposit account economics and making conventional bank accounts more expensive for consumers.

 

 

Underbanked tap prepaid service
Javelin analyzed the U.S. underbanked, currently estimated as one out of six people, to find means of successful outreach to this expanding segment that will benefit from the growing number of reloadable and multifunctional prepaid products in the market as access to conventional checking services is curtailed. Both financial institutions and nonbanks can supplement their traditional account services, using prepaid as a tool to help consumers establish financial services access and move toward more mainstream financial relationships. Javelin’s report delineates how underbanked consumers are active prepaid transactors, making nearly twice as many monthly payments using a prepaid card as do other consumers.

“Prepaid cards, especially general-purpose reloadable cards, are unique in their ability to fill a void in both the payments and DDA markets,” says Beth Robertson, director of Payments Research at Javelin. “As the role and associated cost of a traditional banking relationship evolves, banks and consumers will look to options like prepaid to meet changing market needs for financial inclusion.”

 

 

Younger generation takes to prepaid as well
Younger consumers have also drifted from the mainstream as the CARD Act prohibited the issuance of credit cards to individuals under the age of 21. Combined with the revenue-cinching potential of the Durbin Amendment, this regulation has driven the payments industry to actively market prepaid cards toward students and young consumers. Javelin’s research report shows how Gen Y consumers are not only more likely to own a prepaid card, but also use these cards with greater frequency than other generational groups. The popularity of prepaid cards among younger consumers is a boon to issuers of prepaid products because these figures should only increase as the under-18 segment of Gen Y reaches maturity and payment independence.

 

Interested in prepaid? Try ABA’s program ABA’s Business Solutions subsidiary and its partners MasterCard and TransCard have launched the Community Bank Prepaid Card Program. • Read an article about the program.   • Read a case study about a community bank’s experience with the program

 

Prepaid sees 25% total market penetration … and growing
Overall, Javelin’s report shows how prepaid card products, now used by one in four consumers, are being used more frequently. For example, in 2010, nearly one in seven prepaid card users used their cards for an in-store purchase in the last seven days, an increase from 2009. Driving continued use and product growth will be the critical balancing act for prepaid issuers.

“Financial institutions will need to carefully evaluate the optimal price point(s) for prepaid versus traditional DDA offerings,” says Mary Monahan, managing partner and research director at Javelin. “Identifying the value points for traditional versus prepaid customers will be crucial to building and maintaining demand.”

The 2011 Prepaid Cards and Products report is based on data collected online by Javelin in September 2010 from a random sample panel of 4,998 consumers and from interviews with a variety of leading stakeholders in the prepaid market. The stakeholders included card networks, bank issuers, and providers of prepaid cards and services.

The study explores the growth of prepaid cards and proposes strategies FIs can use to promote prepaid cards, create revenue streams, and grow relationships with new consumer groups. To learn more about the study, click here.