Prepaid Card Volume Is On the Rise

ROCKVILLE, Md. -- The prepaid card industry has a bright future, according to usage trends and debit-driven regulatory change, according to "Prepaid and Gift Cards in the U.S.," a new report from Packaged Facts.

The report estimates that prepaid card payment volume will rise 22.4 percent to $247.5 billion this year, up from $202.2 billion in 2011, on the strength of almost 10 billion transactions. Yet continued growth depends on how the financial industry responds to certain challenges, such as approaching consumers' dissatisfaction and distrust of banks, and striking a balance between checking account profits and migration to prepaid programs.

Consumers dissatisfied with their consumer banking experience are natural targets for emerging prepaid programs, according to David Sprinkle, publisher of Packaged Facts. If a particular prepaid card product functions like a checking account but without the fees, disgruntled customers may be open to trying it.

The report's analysis also shows that distrust of banks is on the rise among groups that are leading prepaid card candidates, such as members of Generation Y, lower-income adults and unbanked or underbanked Hispanics. However, many banks currently use prepaid cards to shed lower-income consumer checking customers, raising public policy issues, according to Packaged Facts.

The high rate of product abandonment, along with the high rate of retention of banking and checking accounts, presents a major challenge for prepaid card issuers. Linking the cards to direct deposit may be one way to increase prepaid card retention and drive usage.

Prepaid debit cards are positioned as an attractive alternative to traditional bank accounts for certain population segments, particularly those without a checking or savings account and those reliant on alternative financial services such as non-bank money orders, check cashing, rent-to-own agreements and payday loans, said Packaged Facts.

Consumers who lack access to traditional bank services have historically used cash as their primary method of payment. The use of cash inherently limits their purchasing power and flexibility, making prepaid debit cards an attractive alternative that lets them participate in mainstream financial transactions by other means.

Prepaid cards can also be suitable for young adults, who may appreciate having a financial services product for which they can qualify and which can meet their relatively narrow financial service needs, according to the report. The industry is reportedly working to find ways to generate profits from the prepaid programs themselves as well as further development of relationships with these consumers over time.

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