By Patti Murphy
ProScribes Inc.
It's a new era in banking and payments. Millennials – the cyber-savvy generation – are now the largest demographic in the United States, with an estimated 90 million, which makes them just over 28 percent of the population, according to the U.S. Census Bureau. Meanwhile, a large and growing number of Americans (especially millennials) are shunning traditional financial institutions for alternatives that leverage new and emerging technologies and that better fit their 21st century lifestyles.
Banks that ignore this turning point in consumer preferences risk alienating a large and growing customer base. In fact, the alienation has begun already, with general purpose reloadable (GPR) prepaid debit cards increasingly taking the place of traditional checking accounts. In some instances, these cards are indistinguishable from checking accounts.
Bluebird from American Express Co. is an example of a GPR card that's pretty much a bank account, except in name. I've been using a Bluebird card for more than a year now to help with budgeting. It offers a savings feature, mobile access (including mobile check deposits), direct deposit, check writing and basic money management tools.
Plus, deposits to Bluebird cards are protected by the same Federal Deposit Insurance Corp. insurance that protects bank checking accounts. Best of all, Bluebird is practically free: I paid nothing to get my card and cash loads are free at any Wal-Mart Stores Inc. checkout. The only fees incurred are for ATM cash access.
Results of numerous research efforts indicate prepaid cards are not just for folks who are too poor to have bank accounts.
According to data analyzed in a recent discussion paper from the Payment Cards Center at the Federal Reserve Bank of Philadelphia, the average income among GPR cardholders was $63,217 in 2013, more than the average income among nonusers (which was $61,402). Fifty-nine percent of users loaded GPR cards at least once a month, the paper reported, with average reloads of about $80.
But here's the most telling data point: more than half of the higher-income users of prepaid cards said they had only begun using the cards in the past year, according to the discussion paper, Millennials with Money: A New Look at Who Uses GPR Prepaid Cards.
A new report from Mercator Advisory Group further illustrates the speed and scope of prepaid adoption. Among U.S. adults surveyed by the firm in 2014, 56 percent had purchased prepaid debit cards in the preceding 12 months, up from 53 percent last year and 47 percent in 2012. Among young adults (aged 18 to 34) two out of three had used prepaid cards, up from three out of five a year earlier.
"Even if they have a checking account, many U.S. consumers are attracted to prepaid cards as a money management tool that lets cardholders control their spending and make electronic payments from funds they set aside, without incurring debt from credit cards or attaching their bank accounts to the transaction," said Karen Augustine, author of a new report from Mercator, Consumers and Prepaid: Rising Use, Especially by Mobile. "Prepaid buyers are more likely to be younger, mobile enabled, and are more attracted now by enhanced security and mobile banking features."
Mercator forecasts 9 percent per year growth in total dollars loaded onto prepaid cards between now and 2017, when it expects load totals to approach $338 billion.
The Pew Charitable Trusts has also examined the prepaid card market. In a 2014 report titled Why Americans Use Prepaid Cards, the Washington-based think tank revealed that 5 percent of adults (or about 12 million Americans) use prepaid debit cards at least once a month. And although consumers offer a variety of reasons for using the cards, Pew found that most use them to help with budgeting and to keep costs down.
"Fear of the $35 overdraft fee is big," said Susan Weinstock, Director of Consumer Banking research at Pew. About two-thirds of prepaid cardholders told Pew researchers they used the cards to avoid overdraft and related bank fees.
I interviewed Weinstock recently, and she described two distinct types of prepaid cardholders: those who use the cards to control spending, and those who use them in lieu of checking accounts. Of the latter category, Weinstock said, "I think that group is going to grow." She added that recent proposals by the Consumer Financial Protection Bureau, when adopted, could help ensure continued growth. (See my prior article, "Prepaid cards get regulatory update," The Green Sheet, Dec. 8, 2014, issue 14:12:01, for more about the CFPB proposals.)
Those proposals also should help level the competitive playing field for prepaid debit and encourage more banks to enter this burgeoning market. Nonbanks have dominated the prepaid space for one simple reason: most, if not all, are unencumbered by the regulatory constraints that are imposed on banks.
Earlier this year, while attending the Network Branded Prepaid Card Association's annual conference, I listened as prepaid company executives railed against the prospect of regulation. One complained, for example, "We provide a service that people aren't getting from banks. Now they want to regulate us like we're banks."
That's exactly what's happening. And for good reasons. The sheer size of the underbanked market – one out of five U.S. households, according to the FDIC – renders it the next big frontier for consumer banking and payments. Regulators can't ignore it. Neither should banks. Consider the revenue opportunities.
The Center for Financial Services Innovation reported that the financially underserved generated $103 billion in fees and interest in 2013 from $1.3 trillion in financial activities using nonbank service providers. That's a 7.1 percent increase over 2012 revenues, according to the CFSI. In a report titled 2013 Underserved Market Size, the center stated the use of mobile banking and payments among the underbanked outpaces that of the market as a whole.
Since 2009, the underserved demographic revenue pie has expanded 26 percent. In 2014, the total should top $107 billion, according to the CFSI. And at 32.2 percent, four-year growth in GPR prepaid cards was second only to subprime auto leases, which grew 34.1 percent, the CFSI noted. How many other financial services businesses post growth numbers like these?
Banks have many advantages that nonbank prepaid card companies don't, like brand recognition, extensive distribution channels, direct access to Federal Reserve payment and settlement networks, and consumer trust. Leveraging these advantages with prepaid debit and mobile access offers real opportunities for success. Think of it as banking outside the box. 
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.
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