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Table of Contents

Lead Story

Thriving in a disruptive market - MLS strategies

News

Industry Update

Zaxby's breach under investigation

UBPS acquisitions further ambitious vision

AmEx restructuring, reimbursements force job cuts

Fed assesses Durbin effect on networks, banks

Features

SMEs and important changes to the EU data protection act

Bill Farmer
Mako Networks Ltd.

Research Rundown

ISOMetrics:
Fed analysis of post-Durbin effects on networks

Website mistakes to avoid

Selling Prepaid

Prepaid in brief

Using KYC to boost prepaid usage

Low fees may be lynchpin for tax refund card adoption

Views

Is prepaid usage a valid measure of banking status?

Patti Murphy
ProScribes Inc.

Top five reasons to sell POS systems

Brian Jones
Harbortouch

Is m-commerce at a cultural tipping point?

Rick Berry
ABC Mobile Pay Inc.

Education

Street SmartsSM:
Tack like a sailor to strengthen your sales

Jeff Fortney
Clearent LLC

Time to take inventory of your leadership stock

Dale S. Laszig
Castles Technology Co. Ltd.

Distancing your ISO from the pack through partnerships

Christopher Briller and Sean O'Neil
MerchantPro Express LLC

Fraudsters persisting in the new year

Nicholas Cucci
Network Merchants Inc.

Company Profile

Glazer_Kennedy Insiders Circle LLC

New Products

Say yes to global customers

Multicurrency processing
Pivotal Payments

Artificial intelligence pinpoints fraud

Kount AI platform
Kount Inc.

Inspiration

You think you've got it bad

Departments

GS 10 Years Ago

Readers Speak

Resource Guide

Datebook

Miscellaneous

2013 events calendar

A Bigger Thing

The Green Sheet Online Edition

January 28, 2013  •  Issue 13:01:02

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Insider's report on payments
Is prepaid usage a valid measure of banking status?

By Patti Murphy

Prepaid debit card use is growing at a rapid clip. So fast, in fact, that the trend may be skewing the government's data on financially underserved households. The Federal Deposit Insurance Corp. released data last fall indicating that 17 million Americans are unbanked, and 51 million are underbanked.

The FDIC considers someone to be underbanked if he or she has used a general purpose reloadable prepaid debit card (those bearing logos of the major card brands) at least once in the past year. Geez, by that definition even I am underbanked. (See "What's still in your wallet?" The Green Sheet, Aug. 27, 2012, issue 12:08:02, for my first-hand experience using a branded prepaid debit card in lieu of my bank-issued debit card or cash.)

From the earliest days Visa Inc.- and MasterCard Worldwide-branded prepaid debit cards have served as substitutes for bank checking accounts. In fact, the first branded prepaid cards were issued as payroll cards by banks as a service for corporate customers needing an electronic payment option for paying employees who didn't have bank accounts. That was in the 1980s.

Prepaid cards have evolved over the years; payroll cards today account for just 10 to 15 percent of all branded prepaid card loads. Yet, as Mercator Advisory Group noted in a recent report - Consumers and Prepaid 2012: More Tools, Please - prepaid cardholder demographics are changing markedly, as consumers access a wider variety of prepaid card products through multiple channels.

Just a few years ago typical users of prepaid debit cards were under the age of 34; in 2012 the popularity needle swung over to adults between the ages of 35 and 64. More than half the surveyed consumers in that age demographic reported using prepaid cards in the prior 12 months; 38 percent said they had purchased retailer-specific prepaid cards, which are known as closed-loop cards, Mercator said.

According to Mercator, U.S. consumers loaded just over $184 billion on open-loop (branded) prepaid debit cards in 2011, a 24 percent increase over 2010 totals. In addition, $299 billion was loaded onto closed-loop cards in 2011. At least one third of prepaid card loads are funded by check or cash, Mercator reported. Also, several banks and merchants offer check cashing services whereby instead of receiving greenbacks, customers receive good funds posted to prepaid debit cards. And most network-branded prepaid programs support top-ups at ATMs.

If someone has a debit card he or she can use to top-up a prepaid card, can you realistically consider the person to be underbanked? The Center for American Progress, a Washington-based think tank, wants the FDIC to refine its definition of underbanked before it embarks on its 2013 survey of unbanked and underbanked Americans.

CAP wrote the FDIC in December 2012 and suggested that survey questions elicit better insight regarding who among prepaid cardholders actually are underbanked, instead of muddying the data with responses from banked consumers who occasionally use prepaid cards.

Besides, as a paper published last year by the Federal Reserve Bank of Philadelphia - Consumers' Use of Prepaid Cards: A Transaction-Based Analysis - suggests, prepaid cards aren't really designed as substitutes for checking accounts.

"Prepaid cards offer much of the functionality of checking accounts, but that does not mean the underlying economics are the same," the paper noted. For example, the typical prepaid card is used for six months, or less, "a small fraction of the longevity seen with consumer checking accounts," the paper stated.

So what are banks doing?

In a related development, the FDIC issued a report in December 2012 that suggested banks need to work harder to attract low-income consumers. According to the 2011 FDIC Survey of Banks' Efforts to Serve the Unbanked and Underbanked, only about 40 percent of the 7,000-plus banks regulated by the FDIC develop products and services specifically for low-income Americans.

A mere 21 percent offer "checkless" demand deposit accounts (DDAs), the FDIC said. Checkless DDAs are low-cost checking accounts that only can be accessed using debit cards.

Minimum deposits and monthly account fees often are deal-breakers for low-income consumers. Only 15 percent of banks have no minimum balances, while nearly half require initial deposits of $100 or more to open a basic checking account, the FDIC reported.

Nearly two-thirds of banks surveyed charge no monthly maintenance fees provided customers have direct deposit, which sounds promising until you consider that an estimated 40 million U.S. workers have jobs that aren't well-accommodated by direct deposit, especially hourly and part-time workers.

Among banks responding to the FDIC's survey, 20 percent reported charging monthly fees of $3 or more to maintain basic checking accounts.

The FDIC survey reached a random national sample of banks representing all asset sizes using an online questionnaire. Following are some additional findings:

The FDIC also offered advice for how banks can mainstream more of the financially underserved. Here are three specific recommendations:

  1. Develop and expand offerings of basic, low-cost checking and savings products.
  2. Make a play for the small-dollar loan market.
  3. Partner with community organizations to promote financial literacy and bank account ownership.

Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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