Like so many banking customers in recent years, the federal government is going paperless. Well, kind of. Federal benefits checks made way to direct deposit and prepaid cards on March 1, underscoring an increasingly digital and plastic-based economy as well as the meteoric rise of a financial product that was largely unknown to most consumers just a few years ago.
Yes, these prepaid cards are different from both gift cards and prepaid calling cards, and while they’re often referred to as such, they aren’t credit cards or traditional debit cards either. Rather, you can think of these re-loadable prepaid cards as a type of new-age checking account. They offer the majority of the same features as would the combination of a checking account and a debit card – including direct deposit, bank transfers, ATM access, online bill pay, check cashing services, and the ability to make purchases directly at the point of sale – just without the physical check book.
A Shifting Payments Landscape
Though prepaid cards were the fastest growing form of electronic payment from 2006 to 2009, with the number of transactions increasing by nearly 20% during that time, they didn’t truly burst onto the mainstream scene until July 2010. That’s when the Durbin Amendment to the Wall Street Reform & Consumer Protection Act took effect, capping debit card swipe fees (what merchants have to pay banks whenever customers use debit cards) and costing the banking industry $8.4 billion in annual revenue as a result. Given the similarities between debit cards and prepaid cards and the fact that the latter’s swipe fees aren’t regulated, banks turned to prepaid cards to try to offset these losses.
We’ve seen a number of increasingly attractive new prepaid card offers hit the market since then as well as an emphasis on celebrity endorsers that belies the investment being made in this space. Since prepaid cards can conceivably do the job of a checking account or a check cashing store at a lower price and projections indicate that by the end of 2013 their popularity will have increased by roughly 200% since 2010, it’s fair to wonder what role they’ll ultimately play in the personal finance landscape once all the dust settles.
In order to get a few other perspectives on the matter (check out Card Hub’s 2012 Prepaid Card Report), we turned to some prominent experts in the fields of banking, finance, and economics. You can check out each expert’s thoughts by clicking on their name below or simply jump to our Takeaways section for a recap of their insights.
What can you take away from our experts’ insights? Well, there are a few key points:
- The rise of prepaid cards has been a long time coming: While the relative importance of prepaid cards in the payments landscape has increased significantly due to swipe fee regulation and digitized government benefits, prepaid card usage had already been rising at a faster clip than that of credit cards and traditional debit cards for years.
- Heavy investments in the space speak to the increasing importance of this payment type: If you believe in the notion that money talks, the billions of dollars being poured into the prepaid card industry by institutions both public and private should tell you a lot.
- Initial consumer hesitance will make way to rapidly increased adoption: As prepaid cards become more commonplace, their simple ubiquity and the influence of early adopters will encourage widespread use.
- The industry still has considerable growth in its future: Growing consumer familiarity and increased institutional reliance indicates that the prepaid card boom is just getting started.
Ultimately, the most striking characteristic of a prepaid card is perhaps its versatility. The right one can fill in for or even outperform a traditional checking account, check cashing business, retail loyalty program, government benefits program, and more. Increased competition in this space is also driving down fees and fostering the inclusion of more consumer-friendly services in any given offer. In other words, it’s becoming increasingly likely that a single prepaid card will offer a wide-range of utilities, both in the arena of banking and beyond. As such, prepaid cards highlight the broader trend toward streamlined personal financial management.
The versatility of prepaid cards also extends to the demographics of users. While prepaid cards were once predominantly the domain of the unbanked, they are now serving not only as a gateway into the traditional banking system, but as a useful tool for those already operating within it as well.
However, the various names for and applications of prepaid cards also create significant opportunity for confusion among consumers. While this will likely subside in accordance with market penetration, it’s nonetheless something to watch out for in the years to come.
But what exactly do those years hold for the prepaid card market? The following projections from a 2012 MasterCard report might give you some idea:
- Government benefits disbursed via prepaid card will rise from $47 billion globally in 2010 to $177 billion in 2017.
- The prepaid card industry will grow 22% annually through 2017.
- Prepaid could be an $822 billion global industry by that time.
- Aside from the U.S., Brazil, Mexico, Italy, U.K./Ireland, India, Canada, Russia and KSA/UAE are expected to drive the growth of prepaid cards.
It therefore seems that prepaid cards will quickly grow from being the new kids on the block to a global payments force in the near future. We should all familiarize ourselves with the best ways to use them responsibly in the meantime.