The regrettable state of the economy, with unemployment pushing double digits and the credit markets struggling to regain stability, makes prepaid cards that much more of an appealing alternative. So says Dennis Moroney, Research Director, Bank Cards for payment consultancy TowerGroup.
A report coauthored by Moroney, Credit Card 2.0: Smaller Balances and Tighter Margins, states that U.S. consumers have lost half of their net worth since 2007. Trust in major U.S. financial institutions is low. And household debt has increased from $3.6 trillion in 1994 to almost $14 trillion in 2008 - a compound annual growth rate of 10 percent.
Consequently, consumers are looking for alternative ways to reduce debt and save money. "What is the saying - rising tide lifts all boats?" Moroney said. "I think you've got some of that going on here." According to Moroney, one component of this rising tide is consumers - young and older - turning to alternative payment tools for different reasons.
For example, the aging baby boomers who were set to slide into retirement on the funds invested in 401ks must devise new financial strategies since many of their retirement nest eggs were reduced or destroyed by the plunge of the stock market in 2008.
"I think now the savings rate is almost at 7 percent, when it was hovering around 1 percent for the last several years," Moroney said. "So people are squirreling away money to try and build up some reserves."
One way they do that is by foregoing credit cards and their double digit interest rates for prepaid cards, which disciplines consumers to spend within their means, Moroney said.
On the other end of the spectrum are generation Y consumers - teenagers and young adults - who have come of age using debit-style products and constitute one reason for the steady rise of debit card usage over the past decade.
TowerGroup's report demonstrates that shift from credit card to debit card usage. In 1999, debit cards accounted for only 22 percent of Visa Inc.'s and MasterCard Worldwide's total annual purchase and cash volume. It stood at 48 percent in 2008.
Therefore, the comfort level younger consumers have with prepaid cards for activities like person-to-person money transfers and online gaming bodes well for prepaid's future.
What Moroney likes about prepaid cards is their versatility. In a 2006 TowerGroup study, Moroney said prepaid cards help banks cultivate new relationships, cross-sell additional products and retain existing customers by helping them control credit card use.
For example, the wage earner in a family may lose his or her job and be unable to pay off a credit card. Instead of the bank severing the relationship with the customer, the institution can issue a prepaid card.
"The idea is to maintain the relationship," Moroney said. "Work with the consumer so you have a customer for as long as they live."
Moroney recognizes two main obstacles to the growth of the industry: excessive fees and government regulation. He believes the strategy of taking advantage of financially vulnerable cardholders by charging undue fees is a "short-sighted" practice of smaller industry players. "I think it's given a black eye to the industry," he said.
The issue of regulation has become vexing, Moroney stated. The Credit Card Accountability Responsibility and Disclosure Act (known as the Credit CARD Act) hit the payments industry hard, he said. Signed into law by President Obama in May 2009, the act places restrictions on issuers, such as limiting interest rate hikes and fees and imposing new disclosure requirements.
"They're all running around, trying to figure out how to get into compliance by 2010," Moroney said. "It's an enormous amount of work."
An outcome of the new law may be that issuers turn to prepaid products to offset the added burdens on credit card issuing. As Moroney said, prepaid cards may be the "final frontier for organic [economic] growth."
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