The Green Sheet Online Edition
October 13, 2014 • Issue 14:10:01
Insiders report on payments:
Prepaid debit wins over newly affluent
General purpose reloadable (GPR) prepaid debit cards are not just for the unbanked and under-banked anymore. Rather, they are being used increasingly by young affluent consumers. Millennials and high-income generation Xers have been fusing use of traditional banking products (90 percent have checking accounts; 75 percent have credit cards) with alternatives like prepaid debit to manage their complicated financial lives. This is according to a paper recently released by the Payment Cards Center at the Federal Reserve Bank of Philadelphia.
The paper, Millennials and Money: A New Look at Who Uses GPR Prepaid Cards, discusses findings of surveys by the market research firm Phoenix Marketing International. And it comes as the Consumer Financial Protection Bureau is said to be readying proposed rules clarifying how consumer protections under the EFT Act and its implementing rules (Regulation E) apply to prepaid debit cards.
"The picture of GPR prepaid cards that emerges from the Phoenix research is one of a product that, with some variation in targeting and delivery channels, can reach a number of mass market segments, including middle- and higher-income households that use a range of banking services," the report stated. "In fact, the survey found evidence of a group that might be described as hybrid financial services consumers, mainly consisting of young adults and including some lower-income households. These consumers fuse traditional banking services with a complement of new and alternative options for conducting transactions and managing finances."
I totally get it. In fact, that's precisely why I use a reloadable prepaid debit card, in addition to checks, my debit card and, occasionally, a credit card. But prepaid cards are not always a good bet. The Center for Financial Services Innovation – a Chicago-based group that promotes financial inclusion through technology innovations – recently gave the prepaid industry a grade of A-, saying prepaid programs can do more to help consumers.
"We have seen tremendous growth and innovation in this space," said Jennifer Tescher, President and Chief Executive Officer of the CFSI. "But there are opportunities and demand for providers to go further, to help consumers build healthier financial lives."
That's where the CFPB comes in. The federal consumer watchdog agency was given rulemaking authority for Regulation E (which was implemented originally by the Federal Reserve Board) when it was created by the 2010 Dodd-Frank Act. Reg E covers consumer electronic funds transfers.
Many prepaid debit card companies say they abide by the spirit of Reg E. But some of the particular protections accorded debit cardholders don't square well with the business models for prepaid debit card products. For example, Reg E requires that debit cardholders be provisionally re-credited while a disputed transaction is investigated. Prepaid card companies argue that being held to that standard is an open invitation to fraud. Reg E also requires extensive disclosure statements; prepaid companies say they have limited space on their packaging to provide the kind of disclosures Reg E envisions.
Perhaps the most controversial issue, though, is overdrafts. I addressed this in my July 14, 2014, column in issue 14:07:01: "Should prepaid companies be regulated like banks?" Several prepaid card companies have introduced overdraft protection, arguing consumers are clamoring for the service. The CFPB said it's not so keen on the idea.
Prepaid by the numbers
Reloadable prepaid debit cards are not a recent phenomenon. In fact, "stored value" cards have been around for decades. The cards got a big push in the 1990s, when the U.S. Treasury and state governments began issuing MasterCard- and Visa-branded reloadable prepaid cards in lieu of issuing benefits checks. More recently there has been a deluge of prepaid debit card programs that aim to help move unbanked and under-banked Americans into the financial mainstream.
The proof is in the numbers: according to Federal Reserve data, prepaid card payments are growing faster than all other noncash payment methods: 18.5 percent per year between 2006 and 2012. In 2012, U.S. consumers made 9.2 billion payments using prepaid cards, up from 3.1 billion in 2006. Just over a third of those transactions (34 percent) were with GPR prepaid debit cards, according to the Fed's 2013 payments survey.
The Pew Charitable Trusts noted in a 2014 report that 5 percent of U.S. consumers (or 12 million adults) it had polled use general purpose prepaid cards at least once a month. The overriding reason most consumers gave for using prepaid debit is their need to control spending, bank fees and debt, Pew stated.
The Philadelphia Fed, in its paper, reported an even rosier outlook: between 2012 and 2013 reported ownership of GPR prepaid debit cards grew from one in five U.S. consumers, to one in every four. What's more, more than 50 percent of higher income cardholders said they had begun using their cards just in the past year.
The paper offers additional insights about who is using prepaid debit cards. These are some of the findings reported.
- Age is the biggest determinant of GPR prepaid card ownership; ownership rates are highest among the youngest adults and decline in each progressively older group. For example, 45 percent of millennials and 35 percent of generation Xers had the cards in 2013, compared to just 18 percent of baby boomers. Overall, the average age of GPR cardholders is 41, substantially younger than the average nonuser (54).
- The average household income for GPR prepaid cardholders last year was $63,317, a huge jump over the 2012 average ($55,374) and more than the average 2013 income among noncardholders, which was $61,402.
- Asked about usage, 56.5 percent of cardholders earning $50,000 or more a year had used their GPR cards in the previous month, compared to 43.5 percent of those earning less than $50,000 a year.
- GPR cardholders across age and income groups reported that prepaid debit cards play a positive role in their financial lives: 59 percent said their cards enabled them to "manage money better/spend less" and 62 percent said the cards helped them avoid overdraft fees.
- Nearly six in 10 GPR cardholders (59 percent) load funds onto their cards at least once a month; the average reload is $78. High-income millennials make the most reloads onto their cards and the highest value loads: between $84 and $117 per month.
- Two-thirds of cardholders report paying monthly fees; among those paying fees, the average monthly outlay was between $5 and $6 in 2013, the same as in 2012.
- More than one fifth (22 percent) of consumers polled described themselves as "underbanked"; 52 percent have bank accounts.
- GPR prepaid cardholders are attracted to other alternative financial services products; 60 percent have transferred money to another person or account inside the United States, while 30 percent have sent international transfers. The preferred service for person-to-person payments is PayPal Inc., with 53 percent of GPR cardholders saying they use PayPal, compared to 43 percent of all households.
So what does all this say about the future of prepaid debit? "In a business where scale economies matter, tapping into a consumer base that generates more dollar volume helps to achieve efficiencies. Consumers familiar with financial services, particularly with card products, can bring lower servicing costs," the Philadelphia Fed wrote, noting that an advantage for products that appeal to millennials is that generation's size: about 77 million. "If GPR prepaid achieves critical mass within a group of this size and use continues into additional life stages, then a promising future is in store," the Fed added.
Patti Murphy is Senior Editor of The Green Sheet, as well as founder and Editor of InsideMicroFinance.com. Email her at email@example.com.
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