One significant hurdle faced by prepaid card providers is how to get consumers to use prepaid cards for longer periods, use the cards more often and spend more with them. A report conducted by The Payment Cards Center of the Federal Reserve Bank of Philadelphia and the Center for Financial Services Innovation suggests the answer may be to offer direct deposit on the cards.
The report, Consumers' Use of Prepaid Cards: A Transaction-Based Analysis, said a linkage seems to exist between value load and longevity characteristics and direct deposit. Prepaid cards that did not allow users to direct deposit funds to the cards were used less often and for shorter periods. In contrast, cards that did offer direct deposit were used more often and for longer periods, the researchers found.
According to the research, over the life of the card the total median value loaded onto general purpose reloadable (GPR) cards purchased online, and that also come with direct deposit, is $9,460. But for GPR cards purchased online that do not come with direct deposit, the median load amount was $427.
The disparity was even greater for GPR cards purchased from financial institutions (FIs). The median value loaded over the life of the card onto those direct deposit-enabled GPR cards was $9,737, while the load value was only $353 for FI GPR cards without direct deposit.
The report said GPR cards that have such patterns of value load "remain active at least twice as long (or longer) and have 10 times or more purchase and other activity than other cards in the same program category," Additionally, such cards apparently generate at least four times more revenue for card issuers. "Average monthly cardholder costs are about twice as high, because these cards are used more intensively; on a per transaction basis, cardholder costs are lower," the report noted.
The research was based on 280 million transactions made on over 3 million cards issued by Meta Payment Systems, a division of Meta Financial Group Inc. Robert M. Hunt, Vice President and Director at the Payment Cards Center and co-author of the report, said that, although the data set was sizeable, drawing conclusions about cardholder behavior based on the data is limited.
For example, there is no way of knowing the source of funds that cardholders loaded onto the cards. "You could be getting your pay check deposited on it," Hunt said. "You could be getting a retirement check. You could be transferring funds from another financial account that you have – they're just doing it at a certain frequency that we observed in the data. And we don't have a lens for figuring out which of those things is happening."
Another mystery is why cardholders who have bank accounts would need to purchase GPR cards from their banks. "Most likely the people coming and getting that card are customers of that bank," Hunt said. "[They] probably have checking accounts at that bank. And yet for some reason they go in and get a prepaid card. And I can't tell you why."
Hunt offered several possible scenarios. Bank customers could be using GPR cards for "envelope budgeting" – putting aside money for a special purpose. Or perhaps bank account holders use GPR cards to segregate "hobby money" or entertainment funds from general expenses. A third possibility is that parents purchase GPR cards for college-age sons and daughters. "This is an easy way for them to provide a regular allowance to them for spending money in an account that is not going to get overdrawn and has relatively low costs," Hunt said.
It can be argued that by adding direct deposit to the cards causes prepaid card accounts to function more like traditional checking accounts. But the differences between basic checking and direct deposit-enabled GPR cards are striking.
While the median length of time that such GPR cards are active hovers around a year, primary checking accounts last between 10 and 14 years, according to studies cited by Hunt. "Even though the cards in many ways are being used in a way that would be similar to a debit card, the economics can't be the same because the lifespan of the product is so different," he said.
Another statistical category that bears further analysis is the revenue earned over the life of various GPR cards with direct deposit. The report said GPR card providers can expect to earn anywhere from $93.75 (for cards available at FIs) to $152.80 (for cards available in retail stores) per card. In comparison, revenues on GPR cards without direct deposit was only about $11 for both types of cards mentioned above.
"These are not very large numbers," Hunt conceded. "And that's with direct deposit. The cards without direct deposit are very modest."
Hunt said the expenses of programs, such as distribution costs of getting the cards into consumers' hands, must be weighed against the revenues issuers earn over the lifetimes of the cards. For banks looking to get into prepaid – a growing trend – that metric is important to take into account.
"You cannot operate by analogy from a checking account into prepaid," Hunt said. "The economics are different. The distribution model is different. You are going to attract a different kind of customer population. And your customer service is going to be somewhat different. You need to go into it deciding that you're going to be a provider of prepaid card services, rather than thinking about it [as an] extension to business you already know well." 
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