The New Breed Of Prepaid

With lower fees, better capabilities, and some regulatory advantages, today’s prepaid options resonate with a range of financial institutions and consumers.


In today’s financial services market, card issuers and financial institutions alike want to expand their client base. Many are looking to next-generation prepaid cards as a way to appeal to a wide audience and build new relationships. The services and conveniences of prepaid cards are making them an increasingly popular choice for consumers. Consumers loaded nearly $500 billion onto prepaid cards in 2011, according to the Wall Street Journal. That’s a 150% increase over the $200 billion loaded in 2006.

Chase, American Express, and other large issuers have revamped prepaid programs and messaging to target an affluent audience. New products now tout the security prepaid cards provide for travel or financial management, especially for children. Companies such as KAIKU Finance and Plastyc are working to make prepaid cards a mainstream alternative to traditional checking accounts. And for unbanked consumers, prepaid cards are still a less expensive alternative to traditional check-cashing sources.

The potential benefits of prepaid cards extend to a range of consumers, and new programs are addressing old drawbacks.  For example, in addition to numerous fees  — activation, ATM usage, bill pay, and customer service to name a few — prepaid cards historically cost consumers approximately $10 a month, according to the Wall Street Journal. That’s significantly more than a card linked to a traditional financial account. New prepaid cards have lowered their fees, some now cost as little as $1.95 per month, and added benefits such as federal insurance, budgeting tools, and the ability to reload the card at point-of-sale terminals or via a mobile phone.

New prepaid cards have lowered their fees and added benefits such as federal insurance, budgeting tools, and the ability to reload via a mobile phone. 

Prepaid cards can be beneficial to financial institutions, too. The Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 capped debit card interchange at 21 cents per transaction. Many prepaid cards, however, are exempt from the cap, so financial institutions can charge merchants pre-Dodd-Frank standards of 1% to 2% for purchases made with prepaid cards.  Although size exempts the majority of credit unions from Durbin’s reforms, they still must compete with bank pricing. As such, prepaid cards can be a lucrative way to supplement lost revenue.

A Gift From Banner Federal

Banner Federal Credit Union ($58.49M, Phoenix, AZ) works with a third-party provider to offer members an ATM-issued, multi-brand prepaid gift card called myGIFT card.

“The gift card is fast, secure, and provides a branded option to participating merchants in our market area,” says Roger Swanson, CEO of Banner Federal.

To address security concerns, the gift cards are activated only when they dispense from the ATM. This precludes someone from skimming the card numbers at a cash register or while the product is hanging on the store racks.

“We are having modest success with the application,” Swanson says of the four-month-old program. “It takes gift card purchases out of our teller line and makes for a fast, user-friendly experience at the ATM.”

The credit union does not consider the gift card an alternative to its traditional VISA debit card, but Swanson says the credit union could explore that possibility as the economy recovers.

Leave Your Travelers Checks At Home

American Airlines Federal Credit Union ($5.62B, DFW Airport, TX) is adopting prepaid as a way to give members traveling overseas a reliable way to pay for goods and services. The credit union’s new EuroPay-MasterCard-Visa (EMV) Travel Prepaid Card is available to members with a valid debit or credit card account. 

Instead of using a magnetic strip, the card is embedded with a microchip that transmits encrypted data. This method is already the international standard in much of the world, so members can use the card whether they are at a bistro in Paris, a train station in Moscow, or a glass shop in Venice.

The card requires no monthly maintenance fee; however, there is a $5 enrollment fee and a $2 ATM fee. The card also requires a 1% transaction fee for purchases. Members must load a minimum of $20 USD to activate the card and cannot carry a balance of more than $5,000 USD on the card. Members can load as much as $3,000 USD per day by going online or calling customer support.

Prepaid cards are not the solution for every institution; however, the channel is growing in popularity and members will become increasingly more comfortable with it. So whether a credit union is targeting high-income individuals jet-setting across the globe or local shoppers going about their everyday lives, it must identify the points of pain in its business model that could make a member consider prepaid cards. Then offer solutions that will ultimately bring that member back into a fully engaged financial relationship.