Changes in consumer behavior have pressured the profitability of card issuers in recent years. As consumers seek better value from traditional products and services, card issuers need to reassess their current products, costs, and revenue streams, rather than simply adding new products to their portfolios.
Although issuers have been putting much effort into bringing services, such as mobile payments, to market, they should not forget the payment methods that are already ingrained in consumers’ daily behavior—products and services that could improve their bottom line without the need for significant investment in technology or consumer and merchant education.
The U.S. has one of the largest payments markets in the world and one of the highest penetrations of payment cards, with multiple debit and credit cards present in most wallets across the country. However, there is a card product that can provide flexible, value-added services to existing customer bases and attract new account holders, which is often only thought of in relation to low-income individuals—prepaid cards.
Looking again at prepaid cards
Prepaid cards offer issuers the opportunity to generate income from fees, but also represent an area where they can offer consumers extra benefits and build relationships with their merchants.
Prepaid cards are no longer simple “load and spend” products. Driven by the huge demand from millennials and other consumers who want access to financial services without bank accounts, the functionality available is starting to emulate not only that of traditional payment cards, but of other channels as well. For example, as an incentive American Express now offers cash back when making purchases in-store and online with this card type, a feature typically linked to credit cards.
With easy card-to-card transfers, convenient card loading options, flexible bill payments, the capability to transfer money online or via mobile, and decreasing fees, the prepaid card is starting to gain additional traction with consumers.
The U.S. prepaid card market could already be viewed as mainstream, with retail spending using prepaid cards in the country topping $118 billion in 2013, according to The Nilsson Report.
And the future bodes well. Aite Group predicts that the amount loaded onto U.S. general purpose prepaid cards will rise to an estimated $106 billion in 2016. This figure doesn’t even closed-loop cards.
These numbers are not insignificant, and they underscore that prepaid cards can offer much more than they currently do and therefore provide many opportunities for growth.
Although meeting the needs of the unbanked and underbanked will undoubtedly remain a key driver to help combat financial inclusion, prepaid cards have also attracted a wider audience amongst mainstream financial services consumers in recent years. Not only do they offer a more secure and convenient way to make purchases, more and more consumers are also using them for budgeting tools, gifts, or online shopping.
As with all financial products, prepaid cards come in all shapes and sizes, with numerous options available for consumers offering different benefits in the U.S. marketplace. Although adoption has grown, with an average lifespan of just six months, the next hurdle for issuers is to extend the lifeline of these cards to cultivate a habit of utilizing them more often.
Thinking beyond familiar uses
New initiatives could include an issuer adding value around its lending services by offering a home improvement loan on a prepaid card, enabling the consumer the convenience of making numerous transactions with multiple retailers and service providers.
Or in an issuer’s merchant services division, a new twist would be offering a small merchant a way to pay for the supplies they need to run their business.
And what about introducing loyalty programs tied to prepaid cards that issuers can target towards high net-worth consumers?
Prepaid cards may offer consumers a convenient way to make purchases, but they need to also make business sense for the issuer.
Think beyond a few inches of plastic
It’s important to note that the prepaid element of financial products does not lend itself solely to cards.
Prepaid has made the transition to wearables and is the main driver behind many high-profile mobile wallets. In fact the prepaid function is a key enabler of innovation. In 2014 in the U.S., several music festivals went cashless by supplying prepaid wearables (dog tags and/or bracelets) to festival-goers. These wearables were pre-loaded by the customer and could be reloaded at points on-site, via the internet or through a specially designed mobile app.
With preloaded wearables expanding to jewelry and even clothing, the prepaid market is one of the fastest-paced in payments.
Prepaid beyond the physical
To cater to customers weary of making purchases online, financial institutions have begun to offer virtual prepaid cards that give the cardholder more control over their security when shopping online. These can be issued at ATMs and online.
The cardholder can manage their prepaid card on the internet by setting their own limits, including spend per transaction and the total amount of transactions the card can make, and activating SMS notifications to tell them when the card is used.
What will set yours apart?
In order to be successful, card issuers need to evaluate their own market and its consumers. They must consider what differentiators they could offer in-line with their brand that would help to drive acceptance and value.
They should also decide the level of control and flexibility they want to have over the program. Although third-party program managers can get products to market quickly, some issuers may find it more beneficial to have access to their own card management system. This choice will enable them to amend the programs as often as they like, to ensure they keep up with market trends and stay ahead of the competition.
The flexibility prepaid cards offer allow them to be marketed in various formats to all consumers. The right product marketed in the right way will get an issuer noticed, but in order for the product to survive, grow, and help increase the bottom line, it is all about acceptance and value. This is where only the consumers and merchants can be the judge.
Thus, card issuers must remember that while prepaid cards introduce considerable flexibility, simply investing in the product without having a strategic plan in place could mean it becomes the plastic equivalent of the loose change in a consumer’s pocket.
About the author
Anthony Genovese is vice-president of consulting services at Compass Plus.
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