By Patti Murphy
ProScribes Inc.
I really like prepaid debit cards, and I'm not alone. According to the TSYS 2016 U.S. Consumer Payment Study, nearly three out of five adult Americans (29 percent) use general-purpose (branded) reloadable prepaid debit cards. Most of these folks, like me, are not unbanked or underbanked, the terms used to described consumers with no or tenuous relationships with banks. Our reasons for carrying prepaid debit cards are varied, but three stand out as the most common: budgeting, convenience and security.
Like many consumers my age (AARP-eligible), I prefer not to buy too much on credit. Cash is a hassle, and easy to lose track of. Debit cards are too vulnerable. As long as banks issue debit cards with magnetic stripes, I worry about smart crooks accessing my card information and using it to empty out my bank accounts. With a prepaid card the only funds at risk are what I put on the card: pocket money, typically a few hundred dollars at a time.
Plus there's this added benefit: I use Bluebird, a prepaid card issued by American Express Co. I don't carry a traditional AmEx card – it's too pricey for my taste. But Bluebird, prominently emblazoned with the AmEx logo, provides the same wallet panache.
The irony doesn't escape me. Prepaid cards, after all, are commonly associated with the unbanked and underbanked. But that's a misconception. Javelin Strategy & Research reported last year that nine out of 10 prepaid cardholders also have credit and/or debit cards; 73 percent have all three. Just 7 percent of those surveyed use prepaid cards exclusively. Prepaid debit cards – reloadable general-purpose (branded) cards as well as non-reloadable versions used for gifts, rebates and incentives – are a relatively recent addition to the payments landscape. Back in 2005, Americans made just 3.3 billion payments using prepaid debit cards, according to the Federal Reserve. By 2015, the most recent year for which Fed data is available, the total had nearly tripled to 9.8 billion payments.
The average value of a general-purpose prepaid debit card was $33 in 2015; the average transaction using private-label prepaid cards was $23. This compares to an average $36 for traditional (non-prepaid) debit card payments and an average $72 for credit card payments in 2015, according to the Fed's data. More recently, Mercator Advisory Group said it expected more than $300 billion to be loaded onto general-purpose prepaid cards, alone, in 2017.
Much of this increase in prepaid debit card usage can be tied to the coming of age of millennials. In fact, a 2014 report by the Federal Reserve Bank of Philadelphia found increased usage of prepaid cards among millennials exceeded increases among all older generations.
There are several reasons for this. Many parents, for example, use prepaid cards to fund children's allowances and help teach them money management. Also, many millennials, having come of age during and after the Great Recession and often burdened with college loan repayments, either aren't being offered or prefer to avoid credit cards. Cash and checks are just too 20th century for this demographic. Prepaid debit card accounts, on the other hand, are easily loaded onto 21st century mobile payment apps.
Prepaid debit cards do have drawbacks. "The ease of customer acquisition has created a product with high customer churn and low issuer loyalty," said Michael Moeser, Director of Payments at Javelin. "Prepaid lifespans are often measured in months, compared to credit cards and bank accounts, which are measured in years."
Minimizing churn with prepaid cards will require innovative thinking by card issuers, along the lines of making it cheap and easy to load funds with services like direct deposit, mobile check deposit with expedited funds availability (a new fee income opportunity), and more value-added services, including budgeting and savings tools. Better pricing is a must. Most prepaid cards carry monthly and/or cash-load fees that range upwards of $5 – a turnoff to price-sensitive consumers. The Bluebird card carries no monthly fees, and cash loads are free at any Walmart – two reasons I've held onto mine for six years and counting.
Gift cards aren't just an unimaginative gifting option; they've become an integral part of the retail payments mix. Among shoppers surveyed in 2015 by Blackhawk Network Holdings Inc., 48 percent had used gift cards in the past year. What's more, 87 percent gave merchant-specific prepaid cards high marks for convenience; just 82 percent said the same thing about traditional debit cards.
Savvy retailers are realizing they can drive more sales by offering private-label prepaid cards, their own and those of others. In Maryland, where I live, regional grocer Giant Eagle operates a loyalty program that offers discounts to participants on groceries and gas for every dollar spent in its stores and at its pumps. To sweeten the pot, Giant Eagle carries a plethora of private-label gift cards.
So whenever I'm planning a shopping spree I stop at Giant Eagle first for the necessary prepaid cards. And, I assure you, I'm not alone. As a result I've been averaging about three free tanks of gas a year. It's a sweet loyalty play. Programs like this can be a boon for issuers and will drive continued consumer adoption of prepaid cards. 
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. Email her at patti@greensheet.com.
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