For the first time in 20 years, a new payment form, the pre-paid card, is making significant inroads. Prepaid technology presents credit unions with a fresh new opportunity to serve existing members, reach out to new market segments, and expand their brand recognition. Prepaid cards further the evolution of the card payment business from the “pay later” of credit and the “pay now” of debit, to the “pay before” of prepaid.
Prepaid cards are easy for consumers to understand and use. They work in a manner similar to debit cards, allowing the cardholder to use a conventional plastic card to link to an account established at a financial institution. The consumer determines the card’s spending limit by adding money directly to the account, and certain cards can be “re-loaded” with additional money as needed. Funds from a prepaid card can be accessed via ATM, PIN POS, and signature POS delivery channels. Prepaid offers tremendous flexibility, convenience, and spending control.
Consumers have quickly adopted prepaid cards. Two out of three U.S. consumers have purchased a prepaid card in the past year. With the popularity of prepaid cards on the rise, estimates predict that prepaid cards will carry over $100 billion in value in the coming year. By 2008, the value of U.S. prepaid card transactions is expected to top $185 billion.
The huge opportunity for prepaid card growth stems from its potential to displace cash and check payments, totaling $3.2 trillion in 2004. Consumers do indicate that they consider prepaid cards to be an alternative to checks and cash. While the complete replacement of cash and checks is unlikely, the potential is important to recognize.
Open Loop is the Future of Prepaid
Two types of prepaid cards are available in the market, “open loop” and “closed loop.” Open loop prepaid cards carry a Visa, MasterCard, Discover, or American Express logo and are accepted wherever these networks are honored. Closed loop prepaid cards are sold by merchants and are used exclusively for payments at their locations. Either open or closed loop cards may have a re-loadable feature, depending on the issuer’s design functionality.
Open loop prepaid cards are clearly the future of prepaid. While closed loop cards have led prepaid growth to date, estimates predict equal market representation of open and closed loop prepaid cards by 2008. In the meantime, closed loop prepaid card growth will continue and merchant prepaid card programs will remain popular, particularly given the success that many have enjoyed.
Open loop prepaid’s staggering growth is predominately due to the flexibility and payment opportunities it offers consumers and credit unions alike. Open loop prepaid cards have the potential to enhance the member relationship and provide new payment options to consumers who have not been reached through traditional deposit accounts or debit and credit cards. Unlike gift card programs of the past, re-loadable open loop prepaid cards, with their longer life cycle and recurring credit union contact, offer potential to build member relationships via targeted marketing approaches.
Prepaid Segment Marketing Opportunities
Re-loadable open loop prepaid cards present an opportunity to use targeted marketing to enhance member relationships and reach new members. Rather than trying to reach all members with one card, open loop prepaid cards allow credit unions to offer targeted products to meet specific member needs. Open loop prepaid technology is being applied to a broad spectrum of payment cards including Gift Cards, General Purpose Re-loadable, Teen Cards, Travel Cards, Payroll Cards, Health Savings, Electronic Benefits, Disaster Relief Cards, and Social Welfare Payments.
While re-loadable prepaid cards can benefit many markets, the benefits of prepaid are particularly great for the nearly 80 million “underserved” consumers in the United States. About one-fourth (26%) of U.S. consumers are considered financially underserved, meaning they lack a traditional deposit account or have limited access to credit. While these consumers have access to money (this segment receives approximately $1 trillion in payments and income), the underserved often face challenges in turning paychecks and disbursements into a mechanism to pay bills or purchase products and services.
Credit unions could provide a great service to SEGs by creating a program for underserved consumers to transfer paychecks and disbursements onto a re-loadable prepaid card. Such an offering would spare this segment the expense of using check-cashers and the risks of carrying excess cash. Prepaid cards also unlock payment options for the underserved that other consumer segments take for granted, such as electronic bill-pay, remittances to family in other countries, and even pay-at-the-pump gas. Ensuring access to safe and affordable financial services is in perfect alignment with the credit union industry mission and can help the credit union develop a relationship with the underserved segment.
A New Business Model
Along with the opportunity to develop and build member relationships, open loop prepaid cards also present a new revenue model. Unlike debit and credit cards, open loop prepaid revenue is earned primarily from issuance and service fees and is devoid of interest revenue. Nearly all of the revenue from open loop prepaid is earned from fees (80%), interchange is only a small contributor (10%), and other charges (float and not-redeemed) make up the balance.
In the current environment of net margin compression on credit cards, the non-interest income from open loop prepaid cards is a welcome source of revenue. As interest rates continue to drop, credit unions need to pursue product opportunities that will generate non-interest income.
With the prepaid market poised for exponential growth, credit unions must choose the right partner to help them capitalize on the benefits of this new payment form. Credit unions evaluating a prepaid business partner should consider the company’s expertise and agility in supporting the rapid growth and directional changes that accompany this new payment form. The ideal partner will share the cooperative spirit of the credit union mission and can help credit unions fully realize their goal of ‘people helping people’ throughout all segments of the population – from their current membership, the coming-of-age youth market, and the underserved and unbanked in their communities.
Multiple sources were used for this article. Including: Aite Group, Mintel, TNS Global, CUNA’s The Point for Credit Union Research, and The Bureau of Economic Analysis.
As the nation’s largest CUSO, PSCU Financial Services was formed by credit unions for the sole purpose of providing products and services to credit unions. Along with developing and supporting industry-leading products, we deliver broad-based knowledge and experience that can help your staff design and implement successful programs. Our well-trained staff and state-of-the-art technologies work together to build member adoption and satisfaction for your credit union’s credit, debit, ATM, prepaid card programs as well as online bill payment offerings.