Over the last 40 years, prepaid cards were launched to meet rising payment needs of various customer segments and industry processes. Starting in the late 1980s, USTelecom adopted the single purpose (closed-loop) prepaid phone card.
Seeing the success of the telecoms, the big retail chains adopted closed-loop cards to replace paper gift certificates in the early 1990s. The other major type of prepaid card — open-loop — owes its adoption in the United States in 1996 to federal welfare reform, which mandated that food stamp coupons be replaced with electronic benefits transfer or EBT cards. That meant EBT cards needed to be accepted at multiple merchants and that gave rise to the open-loop (also known as multi-purpose) cards.
In the late 1990s payroll cards emerged as a convenient way for employers to pay their “unbanked” workers. Finally, in 1999 open-loop prepaid gift cards, which at this time had been available in Europe for several years, made their appearance in the United States.
Today, all major card associations (Visa and MasterCard) and companies (American Express and Discover) offer multi-purpose prepaid cards that can be used at any merchant that accepts payment cards bearing the brands’ logos. There are many factors that have influenced this industry, but the key drivers are:
- Rise in demand for prepaid cards in remittances.
- Greater demand for cash alternatives.
- Increased unbanked and underbanked population.
- Accelerated need for cash alternatives and demand for cards due to Covid-19.
This demand has bumped the market value of U.S. prepaid to $396 billion in 2022, with a year-over-year growth rate of 5.5 percent. Prepaid is forecasted to surpass $4.1 trillion globally by 2026.
- A prepaid card program is also an untapped opportunity for many financial institutions. Prepaid can help address three critical strategies with one product:
- Acquire new households by reaching new customers who may not qualify for or want traditional banking services.
- Deepen relationships with existing customers by offering a complementary financial solution.
- Generate an incremental revenue stream.
The target market for prepaid cards is vast. It is grandparents who like to send gifts for birthdays and other holidays but don’t know what to buy. It is travelers who don’t want the inconvenience of carrying traveler’s checks and would like a more secure option than cash. It is parents who want to help their child learn about budgeting or how to control spending. And it is the unbanked or underbanked who are either new to banking or have a poor credit history.
Bankers’ Bank has developed a superior program specifically for community banks: Community Prepaid. The compensation structure of this program is unique in that community banks are paid $2 for each card sold and receive 10 percent of interchange. In addition, there are no inventory costs to have plastic cards on hand.
Prepaid cards present a unique offering and target specific customer segments that are in need of simplicity and cost-effectiveness. Prepaid cards, in addition to being an alternative to cash, offer customer safety, security and greater ease of transaction. Customers are using this technology more and more every day; as a community bank you do not want to miss out on the opportunity of this growing industry.
Linda Brennan is VP Bank Cards Relationship Manager for Bankers’ Bank, Madison, Wis. Reach her at [email protected] or (608) 829-6424.