April 20, 2010

Although the recession has flattened the use of most types of consumer payments, banks should be investing in the promising areas of same-day bill payment, mobile payments and prepaid cards, says Aaron McPherson, practice director, IDC Financial Insights, who authored a recent report on consumer payments and spoke to Bank Systems & Technology in an interview.

After growing rapidly from 2003 to 2007, such emerging payment technologies as online bill payment and prepaid cards, stagnated in 2008 and 2009.

But there's hope on the payments horizon, McPherson says. Same-day bill payment should do well because there's widespread adoption of online bill payment (44% of all U.S. consumers use it), he says. Also "some banks are having success with emergency payments, or same-day payments," he says. "The idea is you send a mobile alert to the customer, telling him that a bill is due today, and for $15 they can pay it right away and it won't be susceptible to the usual three-to-five-day waiting period. Essentially, they're sending a wire."

Mobile payments have nowhere to go but up, he notes, and community banks and credit unions have emerged as the innovators here. One bank he agrees is an example of this is Adirondack Trust in Sarasota Springs, New York, which has partnered with Bling Nation to offer mobile payments via contactless payment stickers affixed to cell phones. The merchant gets a lower processing fee that it uses to fund a reward program. "Generally, you don't see big banks doing this kind of stuff," he says.

Prepaid cards are underutilized at this point, he says. "We've been seeing bumpy growth numbers, it's not going well," McPherson says. "I think a lot of that is that issuers are still learning how to market them."

Use of payroll cards went up in 2009 and benefit card use dropped slightly [both trends are surprising given the unemployment rate last year]. Wal-Mart recently announced that it's converting all its employees to payroll cards (so that it doesn't have to distribute checks), so that will bump up usage this year, McPherson says. The 13% usage of payroll cards closely matches the 13% of Americans who are unbanked, who are a primary target for payroll cards, he says. They're also used by people who want to track their funds separately. "A lot of states converted to electronic benefit cards in the last couple of years, so that may have accounted for some growth," he says. Another factor is that insurance companies are using benefit cards more to provide health insurance.

Closed loop gift cards (that work only with the issuing retailer) have dropped in use, but open-loop gift cards issued by banks have ticked up slightly. "People are disenchanted with private label, single-merchant gift cards because they're trying to cut back and they're not doing as much gift-giving," McPherson says. "Open-loop gift cards are holding steady because there's a lot more you can use them for, you can use them as student cards or for managing your money, they're also used for rebates by phone companies."

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