Cover Story: Prepaid’s Big Makeover

Prepaid card program managers and issuers are moving beyond their original customer base and ramping up offerings, producing intense competition and falling prices.

By Jane Adler

Shopped at Wal-Mart Stores Inc. lately? A trip past the checkout lane reveals a robust array of new prepaid card offerings.

For example, Wal-Mart’s long-time prepaid card partner, Green Dot Corp., last October rolled out nine new general-purpose reloadable (GPR) cards, including affinity cards, inside Wal-Mart stores.

Hip-hop lovers can purchase a RushCard Live, a sleek-looking gold card promoted by rap mogul Russell Simmons. Racing fans can get a prepaid card with the Nascar logo.

Older shoppers can choose an AARP card. Prefer something truly personal? Try the customized card that carries a photo uploaded from the buyer’s computer or Facebook page.

Wal-Mart shoppers can also find the Bluebird prepaid card by American Express Co. along with a MoneyPak for PayPal accounts and Wal-Mart’s well-established and popular MoneyCard, now in three varieties. Of course, non-reloadable gift cards are available, too, for every merchant from Applebee’s to Verizon.

Nor is the explosion of prepaid offerings confined to Wal-Mart. Drug-store giant Walgreen Co. launched its Balance Financial card at the end of 2013. Other prepaid card offers are easily found online. Discover Financial Services is processing prepaid cards for casino and lottery winnings.

“We’re going outside the preconceived boundaries of what prepaid was,” says Amit Parikh, who heads prepaid for Riverwoods, Ill.-based Discover.

‘A New, Mature Phase’

Those preconceived boundaries encompassed mostly relatively poor consumers with few or no bank accounts—the under- or unbanked, respectively. The new boundaries now take in more affluent consumers who want something beyond an old-fashioned bank account, and young, tech-savvy adults with little interest in writing checks.

Financial institutions have taken notice of these shifting boundaries by expanding their GPR offerings. U.S. Bancorp recently struck a deal to issue an Angry Birds card to appeal to fans of the popular video game who are seeking a banking alternative. JPMorgan Chase & Co. launched its Liquid card about 18 months ago. Alabama-based Regions Bank offers its Regions Now Card.

The explosion of prepaid card offerings shows competition is ratcheting up among providers seeking new customers. At the same time, prices are getting squeezed—good for consumers, not so good for providers that don’t manage their bottom lines carefully.

“Prepaid cards are a successful financial tool that consumers love,” says Jane Thompson, head of Chicago-based consulting firm Jane J. Thompson Financial Services LLC and former president (until 2011) of Wal-Mart Stores’ Walmart Financial Services. The variety of card offerings is evidence that the market is entering “a new, mature phase,” she adds.

Prepaid cards are carving out a new niche beside conventional debit and credit cards in the consumer’s wallet. The long economic downturn caused many consumers to rein in their spending, and more began using prepaid cards for a variety of transactions to keep their finances in check.

At the same time, consumers became more familiar with the cards as they started to receive funds on prepaid cards for wages, refunds, Social Security and other government payments, and money transfers. Insurance payouts are now more commonly being remitted on prepaid cards. And last August, the U.S. Department of Health and Human Services issued a rule that requires health-insurance providers to accept prepaid cards.

Closed-loop cards, redeemable at specific retailers, still account for most of the market, though general-purpose, or open-loop, cards are quickly grabbing share.

In 2003, the amount loaded on all prepaid cards totaled $124 billion, with less than 5% on open-loop cards, estimates Mercator Advisory Group Inc., a research and consulting firm in Maynard, Mass. The total jumped to $522 billion in 2013 and Mercator expects it to hit $597 billion by 2016, with open-loop cards sporting the Visa, MasterCard, American Express, or Discover brands accounting for about 43% of the market.

“The prepaid card market is evolving,” says Ben Jackson, senior analyst at Mercator.

The 2013 Federal Reserve Payments Study released in December said that prepaid card transactions increased at the fastest rate from 2009-2012 (15.8% annually for open- and closed-loop cards combined) when compared with credit and debit cards, the automated clearing house network, and checks, reaching a total of 9.2 billion transactions in 2012. The report added that the increase in prepaid card payments was “higher growth than reported in previous studies.”

‘Unfairly Pigeon-Holed’

Last year, in a sign of the increasing importance of the prepaid market, card processor Total System Services Inc. (TSYS) bought prepaid program manager NetSpend Holdings Inc. for $1.4 billion.

NetSpend rival Green Dot purchased a Utah bank in 2011 and last year launched its mobile-banking app and service, GoBank, which Green Dot positions as an alternative to traditional banks. In November, Green Dot Bank received approval to purchase the Walmart MoneyCard portfolio from GE Capital Retail Bank, a portfolio Green Dot already managed.

Some big banks are offering their own prepaid cards partly as a way to replace fee income lost when debit card interchange fees were limited under the Durbin Amendment in the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010.

Financial institutions also see an opportunity to tap into a pool of customers that they don’t reach, or reach only marginally. It’s estimated that as many as 70 million Americans don’t have a traditional bank account. With prepaid cards, not only can the banks provide products for this underserved market, there’s also a chance at some point to convert cardholders into regular banking customers.

While the financially underserved remain the main target of reloadable prepaid cards, issuers and program managers are expanding the pool of potential customers. Young people who are more likely to adopt banking alternatives are being targeted along with a variety of niche users who want a prepaid card for a specific reason, such as for budgeting purposes.

Providers also are going after the “unhappily banked,” consumers who don’t like their bank even if they have sufficient household income to be profitable bank customers.

“Prepaid has been unfairly pigeon-holed as a product for those without bank accounts,” says Jennifer Tescher, president and chief executive at the non-profit Center for Financial Services Innovation (CFSI), Chicago. “Prepaid is blossoming into the future of banking. There are whole swaths of America that could find benefit in these products.”

‘A Consumer Champion’

Card features are rapidly expanding to serve these emerging groups of new customers. Some cards hold multiple accounts, allowing the holder to set aside funds for certain expenses. Others offer discounts as program managers experiment with a number of consumer incentives.

Remote deposit capture and mobile apps are adding flexibility to the cards too. Some industry observers believe open-loop reloadable debit cards could even eventually replace a traditional banking relationship as providers add features such as check writing.

New research shows that prepaid cards have wide consumer appeal both to those with and without bank accounts. An October 2013 study by Mercator found that 53% of respondents had made prepaid purchases in the previous year. Other report findings show:

– Young adults and women are more inclined than average to buy prepaid cards.

– Women are 50% more likely than men to buy retailer-specific cards.

– Men are more likely than women to use GPR cards.

– Tablet owners and smart-phone users are more likely than average to have bought prepaid cards in the last year.

– Consumers consider prepaid cards to be a safe way to buy online.

– Fees on GPR cards are a top concern of consumers, but so are the reputation and services offered by the card provider.

– Consumers who bought every major brand of GPR card except the American Express Bluebird card were more likely to have discarded the card when the funds were gone rather than reload it for continued use.

American Express is staking some of its upscale reputation on prepaid. New York City-based AmEx made a big splash in the prepaid market in 2012 when it launched its enterprise growth group. Its dual goals were to make American Express a more inclusive brand and also to introduce new products.

“We think we can be a consumer champion,” says Joanna Lambert, the group’s senior vice president for product strategy and development.

‘Our Killer App’

AmEx relaunched its first prepaid product, American Express Serve, last October with upgraded features such as bill pay and financial-management tools. Surcharge-free cash withdrawals are available at more than 23,000 MoneyPass Network ATMs.

At the end of 2012, American Express launched the Bluebird card through Wal-Mart stores. Both Serve and Bluebird run on the same platform. Bill pay is available on both cards and users can create set-aside accounts to reserve funds for future use.

AmEx now has 5 million prepaid customers, according to Lambert. (That number includes some overseas customers through partnerships in China and Europe.) Processed volume in 2013 was more than $1 billion.

As of last November, reloads on the Serve card are free at the checkout at CVS/pharmacy stores and participating 7-Eleven Inc. stores through a partnership with program manager InComm and its Vanilla Reload Network.

“That’s our killer app,” says Lambert, adding that more retail locations will be announced soon. Bluebird customers can add cash for free at Wal-Mart checkout registers.

As with many GPR card providers, AmEx’s primary demographic target for its prepaid products is those without bank accounts. A fall radio ad campaign for Serve featured a young mother trying to avoid overdraft charges, and a worker at a car service seeking an easy way to cash a paycheck. Lambert, however, says, “The cards appeal to all household income levels.”

For example, Serve and Bluebird customers can create sub-accounts on their card accounts, one for use by the babysitter, for example, and another for a teenager. Funds can be set aside so they are not available at the point of sale, holding them in reserve for later use. “There’s a real need for the household CFO to manage funds better,” says Lambert.

The company plans to add other financial-planning tools to the cards in the next three to six months to help consumers manage spending.

‘An Expanded Assortment’

Other providers are stretching the bounds of prepaid card demographics. Program manager Kaiku Finance LLC offers a GPR Visa card for millennials (ages 18-35) who are early adopters of new technology and open to banking alternatives. (“Kaiku” is the Japanese word for “evolution” or “growth.”) Kaiku also is marketing the card to those without bank accounts and to parents who want a card with low fees and some services for their children.

The cards offer mobile check deposit and electronic bill payment. Cash is available at Allpoint ATMs for no fee. Kaiku also is the program manager for the Angry Birds card from U.S. Bancorp.

Money management has become a big issue for the younger generation, according to Joel Sherwin, president at Kaiku in Los Angeles. Deeply affected by the lengthy economic downturn and tepid recovery, young adults are focused on living within their means, which can be accomplished with prepaid cards, says Sherwin.

“We’ve spent a lot of time looking at the demographics to understand their values and what’s important to them,” he says.

Kaiku markets its cards online through social media, such as Facebook, and via radio ad campaigns. Sherwin believes users will retain the Kaiku card primarily because of loyalty. But rather than offering loyalty points or cash back, Sherwin plans to roll out a marketing campaign in 2014 that promises to give the user a unique personal experience, such as guitar lessons for concert goers.

JPMorgan Chase advertised its prepaid Liquid card on mobile devices, showcasing young users. One ad features a young female dog walker who gets paid in cash and deposits the money with her Liquid card at a Chase branch ATM.

Pasadena, Calif.-based Green Dot aims its cards primarily at those making under $50,000 annually. “But 10% of our customers make more,” notes Kostas Sgoutas, chief revenue officer.

The launch of the new Green Dot affinity cards at Wal-Mart is an effort to create a more tailored approach to prepaid, he adds. Green Dot’s cards are designed to appeal to different segments of potential prepaid customers to serve more Wal-Mart shoppers, who now also can get AmEx’s Bluebird card.

“Before prepaid was one size fits all,” he says. “Now we have an expanded assortment for the consumer.”

‘A Safety Issue’

InComm Inc., with its Vanilla suite of prepaid cards, has identified an emerging demographic group in its user data, specifically young adults, ages 20-30, who select a prepaid card as an alternative to traditional banking services. InComm has positioned its MyVanilla card as a financial product without monthly fees, though cardholders pay various usage fees.

“We see the card as a choice,” says Jeff Lewis, vice president and general manager of the financial-services division at InComm, Atlanta. “We are expanding what we do with the cards.”

About 14 months ago, InComm launched its Vanilla Reload Network, which now includes about 70,000 retail locations. “We are seeing significant [card] volumes and have done no consumer awareness,” says Lewis, who declines to provide specific numbers.

While aiming to keep cards in circulation by encouraging direct deposit, card providers also are working to make reloads as easy as possible. The Vanilla Reload Network allows consumers to add cash at the point of sale at retailers such as 7-Eleven, Wal-Mart and Family Dollar Stores Inc.

“Consumers don’t have to go out of their way,” says Lewis. “We try to make it part of their life. That’s how we position the product.”

InComm plans to relaunch its mobile app for the Vanilla card this quarter. The old version provided balance checks and transaction information. The new mobile app will have remote deposit capture, bill-pay components, and other features. “We want to make it easier for consumers to use,” says Lewis.

Noting another demographic trend, Lewis says that women are using the non-reloadable OneVanilla card to shop online.

“We think it is a safety issue,” says Lewis. On the heels of the big data breach at Target Corp. over the holidays, he notes that women, who typically serve as financial head of the household, are in tune with security threats.

Competition Heats Up

Prepaid strategies among NetSpend’s bank clients have broadened greatly over the last several years, according to Patrick Brown, senior vice president of the financial-institutions channel at NetSpend, Austin, Texas. “Prepaid applies to a wide consumer base,” he says.

Regions Bank, for example, has a strategy to serve the underbanked with a variety of products including money transfers, bill pay and check cashing through its Now account. Other banks target the affluent market with prepaid travel cards.

“We focus on how prepaid works into the bank’s strategy for a segment,” Brown says.

While prepaid cards offer more types of consumers a growing number of features, price competition is heating up as issuers and program managers aim to grab a bigger piece of the market. Some industry observers worry that pricing has dropped so low in some cases that the business model could become unsustainable.

AmEx shook up pricing in the open-loop market with the introduction of its Serve and Bluebird cards, the latter of which competes with prepaid cards at Wal-Mart supplied by Green Dot. The Serve card has a $1 monthly fee and free reloads at more than 15,000 stores including CVS/pharmacy and 7-Eleven. The monthly fee can be waived if the holder enrolls in direct deposit or loads $500 per statement period in any manner except a person-to-person transaction.

Consumers can open a Bluebird account free either online or through a smart-phone app, or for $5 by buying a starter kit at Wal-Mart. The Bluebird card doesn’t have a monthly maintenance fee, annual fee, or activation fee. Other prepaid cards typically carry more fees.

Prepaid’s ‘Last Mile’

Despite Green Dot’s efforts to diversify its customer base, Wal-Mart as of last Sept. 30 still accounted for 62% of its operating revenues, according to a company filing. But in remarks made during Green Dot’s fourth-quarter conference call in late January, chief executive Steven Streit said Green Dot continues to thrive despite its own estimate that AmEx has spent “hundreds of millions of dollars to date in an effort to gain traction in the prepaid market.”

Green Dot had revenues of $573.6 million in 2013, up 5% from $546.3 million in 2012, and finished the year with 4.49 million active cards and fourth-quarter purchase volume of $3.3 billion, up 2% from $3.23 billion in 2012’s final quarter.

In January, Blackhawk Network Holdings Inc., a big prepaid services provider based in Pleasanton, Calif., introduced a low-cost card linked to telecommunications carrier T-Mobile US Inc.’s smart-phone app. The card has no purchase fee, no reload fee in T-Mobile stores, no monthly fees, and no withdrawal fees at 42,000 Allpoint ATM locations.

Issued by The Bancorp Bank, the card provides remote deposit capture through the phone’s camera, bill pay, and online shopping.

“Prices have come down dramatically among the big players,” says Tescher at the Center for Financial Services Innovation.

Prepaid is cheaper than a basic checking account, she notes, but reloads are still expensive. “The last mile prepaid has to deal with is reload,” she says, adding that card providers are beginning to make reloads easier and cheaper.

 

Also, Tescher notes, consumers can sometimes get around fees. For example, Wal-Mart customers can reload their cards for free when cashing a check at the store. “Some players are addressing the issue, but we have a ways to go,” she says.

‘Favorable Fees’

Consultant Thompson worries that pricing may have dipped too low.

“If these cards don’t hold their own and cover their costs, they could falter,” she says.

While she was managing the prepaid program at Wal-Mart, she says, Walmart MoneyCard sales doubled every year for several years after the price of the card was lowered in 2009 to the 3-3-3 plan—$3 to purchase, $3 a month, and $3 to reload. “We were concerned that pricing was too low,” says Thompson. “But the cards made money.”

Leading payment card processor First Data Corp. offers closed- and open-loop cards but has seen quicker growth lately in the open-loop category, especially payroll cards, according to Mark Putman, senior vice president, First Data Prepaid Solutions, Atlanta.

“We have a very fundamental belief in favorable fees,” he says, adding, “You will see more fees coming down to load money on the cards.”

Analyst Jackson at Mercator says some providers with low or no fees are trying to price the cards like commodities. Others are trying different fees based on how the card is used. NetSpend, for example, offers a high-yield savings account (5% annual percentage yield) in connection with a prepaid card.

While the industry is still finding its way, Jackson expects more experimentation with card pricing and features to meet the needs of a broader customer base. He says: “The program managers are trying different approaches.”