May 08, 2013

The growing prepaid card market could be threat or an opportunity for banks, depending on how well they keep in mind the needs of their customers, says Aleia Van Dyke, a payments analyst at Javelin Strategy & Research and author of a new report on prepaid cards. The opportunity for banks lies in capturing new customer segments such as young and underbanked customers, who tend to favor the simplicity and low cost of prepaid cards over traditional checking accounts.

“There’s a big focus on the underbanked segment right now. It’s a segment that no one has been able to grab. Banks are excited to be able to reach them with prepaid products,” Van Dyke notes.

Customers between the ages of 25-34 have the highest adoption of prepaid products, according to the Javelin report, titled “Checking vs. Prepaid: Threat or Opportunity?” The report surveyed customers and found that 21% of that age group had a prepaid product, and 19% of customers between the ages of 18-24 have one. Among the underbanked, the report found that around 15% had a prepaid product.

In addition to the potential for attracting new customers, prepaid cards also cost less for banks service compared to checking accounts. The study cited Chase, which reported that it cost 40% less to serve its prepaid Liquid card holders than its checking account holders.

As prepaid card holders mature in their financial lives, banks can then transfer them to checking accounts. Regions Bank, for example, reported that 9% of its prepaid and check-cashing customers had opened traditional checking accounts, the Javelin study said.

Banks already have checking customers who are better suited for prepaid products as well, Van Dyke reasons. Customers who are over-drafting regularly, have low-fee accounts or have very low balances are good candidates for prepaid products, she says. These customers are probably not ready for the structure and pricing of a checking account, Van Dyke notes, and can be dissatisfied with their bank because of overdraft fees.

While banks can look to turn these customers into loyal prepaid card holders, some non-bank organizations have entered the market with compelling prepaid products, most notably Walmart with BlueBird. Walmart and other non-banks could potentially steal away customers from banks, and therein lies the threat. “They [Walmart] are ahead of the game in terms of keeping a simple and transparent fee structure for their card holders,” Van Dyke comments.

The key in winning over prepaid customers is identifying the needs of the segments who are using these products and designing the products around those needs, Van Dyke advises. Walmart has already done that in terms of providing a simple fee structure for customers who could be hit hard by overdraft fees if they had a traditional checking account. If banks similarly tailor their prepaid products to the needs of younger and underbanked customers, they will see success with those products, Van Dyke predicts. “Banks are working hard to repair their image after the financial collapse. As long as they keep in mind that these customers are hurting that will help them to see continued growth in their prepaid products,” Van Dyke suggests.

Banks also have advantages over non-banks that they can leverage in competing for prepaid customers, Van Dyke says. “A big differentiator for banks is their ATM networks. That’s a great value-add for a prepaid card - no-fee ATM withdrawals,” she remarks.

ABOUT THE AUTHOR
Jonathan Camhi is a graduate of the City University of New York's Graduate School of Journalism, where he focused on international reporting and interned at the Hindustan Times in Delhi, ...