he average user of prepaid cards loads or reloads about $180 onto the product one time per month and makes 3.5 POS transactions with the card, spending about $40 each time, according to research announced at the Prepaid Card Expo in February.

The study of the underbanked demographic, conducted jointly by the Federal Reserve Bank of New York and the Center for Financial Services Innovation, found that cardholders spend 92% of the funds they loaded within a month and the remainder shortly thereafter.

The first-of-its-kind study looked at actual transaction data, rather than anecdotal information from consumer surveys, said Sherrie Rhine, Senior Economist for the FRB-NY.

BankFirst, Diamond Financial Products, Green Dot Corp. and PreCash Inc. volunteered data for the study. Five hundred cardholders were then randomly drawn from each company, for a total of 1,917 prepaid card users.

Rhine said 64% of the cardholders studied were between 25 and 45 years of age.

Prepaid cardholders "use point of sale more frequently than ATM and spend most funds through this method," Rhine said. "They follow market trends in making electronic payments."

Three percent made no loads, so the average value of a load by those filling their accounts was $217. On the high end, 16% of users loaded their cards two or more times a month, for an average of $673 each month.

New pricing regimes

Prepaid card issuers are moving toward monthly fees, structured like traditional bank accounts, and away from transaction-based pricing, said Jennifer Tescher, Director of CFSI. Price points are still not at levels acceptable to underbanked consumers, she added.

Prepaid card provider nFinanSe announced a program in early February "that's making a run on price. It will be interesting to see how customers respond to these new pricing regimes," Tescher said.

That company's new instant-issue Discover Network products carry a suggested retail price of $5.95; a monthly fee of $2.95; a free first load; a free customer service number; and no transaction fees.

Other Association-branded reloadable cards retail for $10 to $15 and charge either monthly fees of $5 to $7 or $1 transaction fees, according to nFinanSe. Deductions are usually made for customer calls to check balances.

On one end of the spectrum, issuers that do not permit negative balances experience short card life spans. To counter this, some providers are adding features associated with debit cards.

Those providers permit negative balances, and they are reporting longer card life among consumers. Tescher said a few are even instituting overdraft protection.

A substitute bank account

"Our research suggests [the underbanked] are using it like a bank account. It's a fairly significant part of their financial life," Tescher said.

"The bottom line is that prepaid and debit are not the same animal, but they play by the same rules. Companies we are talking to are thinking about rewards, credit building and savings features, and customization and personalization."

Because the underbanked have low credit scores or lack credit histories, what they really want is a product to build their credit history. But credit tracking agencies do not capture prepaid transaction data. Enabling that feature would necessitate their involvement.

"Credit bureaus are thinking hard about that," she added.

By adding savings features, issuers increase customer loyalty to their products. "From a savings perspective, this is about stickiness. You want to keep utilization rates high.

I don't think we'll see massive balances," Tescher said. "The point is it signifies a level of trust the consumer has" in the brand.

Ultimately, the prepaid industry has a "desperate need" for standardization, she said. But Tescher cautioned that formalizing product categories now could stifle innovation.

More marketing of prepaid products is needed. "Customers still don't 'get' this product" because its usage is not yet part of the lexicon, she added.