General-purpose reloadable prepaid cards have turned a corner, moving from being a product for low-income or unbanked individuals to being an important tool for younger, high-income consumers.
More Millennials are using prepaid cards as part of their wealth management routine, providing banks an opportunity to introduce prepaid options, according to a new study from Phoenix Marketing International and the Payment Cards Center for the Federal Reserve Bank of Philadelphia.
Phoenix surveyed more than 4,200 consumers online in August of 2013 to develop the report, which the Federal Reserve Bank is announcing today. Sample distributions for age, income and geography were examined to align with the Department of Labor's current population Survey benchmarks. The report compared 2013 findings with those of a similar 2012 report.
Only the two youngest age groups, Millennials [ages 18 to 32] and Generation X [33 to 48] reported higher prepaid card ownership rates compared to 2012.
Millennials showed a nine percentage-point increase, to 45%, while Generation X reported an eight percentage-point increase, to 35%. By comparison, only 18% of Baby Boomers [49 to 67] said they owned a prepaid card, compared to 16% in 2012. No survey respondent older than 75 reported owning a prepaid card.
"Banks in the card-issuing business that have been following consumer preferences for the past decade will not be surprised by this trend," said Susan Herbst-Murphy, senior industry specialist for payment cards at the Federal Reserve Bank of Philadelphia. "It is very much in line with what you would expect of the Millennial generation."
Some prepaid card issuers began adjusting their products in the last year to better serve an evolving customer base.
"What surprised me the most was that 65% of those surveyed in the higher-income bracket, those making $100,000 a year or more, said they used prepaid cards as a way to manage money, spend less and avoid overdrafting," Herbst-Murphy said. "They rated those attributes higher than any other income group."
Prepaid card ownership for all consumers earning $100,000 or more a year rose to 27% in 2013, up from 18% in 2012, the report said.
Higher income is tied in with consumers increasingly choosing to own a prepaid card, rather than being forced to have one from an employer or government services such as Social Security or unemployment, said Greg Weed, director of card performance research for Phoenix.
Prepaid adoption in higher-income settings may also be on the rise because parents purchase prepaid cards for their children in college or high school, Weed said.
The trend essentially means prepaid cards, once viewed simply as a "bridge product" to other financial services, should now be looked at for broader uses, Weed said.
An accurate term for groups that use prepaid cards may now be "alternatively banked" as opposed to unbanked or underbanked, Weed said. "There is a group that has financial choice available to them and they are doing financial transactions in a different way," he added.
Younger and more affluent prepaid card holders have surfaced more recently because it took time for providers to build the infrastructure needed for a prepaid scheme, Herbst-Murphy said.
"Regulations came along in the form of the Card Act and the Durbin Amendment and until those regulations were fully crafted, prepaid card issuers put product development on the back burner," she added.
Prepaid cards will now have staying power, even as mobile payments slowly develop, Herbst-Murphy said. Prepaid cards are often the primary funding mechanism in a mobile wallet, she added.
The U.S. now has a population that "has picked up a general purpose reloadable prepaid card on their own," Herbst-Murphy said.