The prepaid card market has become an unstoppable locomotive, and will continue its course unless unexpected federal regulations slow it down, according to new data.

However, the general-purpose reloadable and payroll prepaid card market has become so competitive and complex that many of the smaller players will fade away or be purchased by rivals, according to a new Aite Group report.

Prepaid cards have become ubiquitous in the U.S. market and will enjoy a compound annual growth rate of 20% from 2010 to 2016, as the number of cards will grow from 9.7 million in 2010 to 29.2 million in 2016, the report states.

"Those numbers may actually be conservative, because there really is nothing slowing it down," says report author Madeline K. Aufseeser, senior analyst with Boston-based Aite Group.

The decline in free checking for low-balance consumers, combined with bigger brands entering the prepaid market, has fueled stored-value cards' growth, the report says. In addition, more card marketers provide consumer-friendly pricing and more employers put payroll onto prepaid cards.

Aufseeser says the data does not indicate that prepaid card fees, a sore point in the past with some consumers, would hold buyers back from obtaining a prepaid card.

"Some issuers are great at disclosing the fees, while others make it harder to get your hands around it and you have to read the 6-point type to get all of the information you need," Aufseeser says.

If the fee transparency issue were to remain significant, the Consumer Financial Protection Bureau would have to step in to establish guidelines, she adds.

Green Dot, NetSpend and H&R Block essentially dominate the prepaid debit market, while First Data dominates the payroll card market, and the power structure is likely to stay that way unless companies merge or are acquired, the report says.

"Some small players will make it work and will survive and make money, but others will have to take advantage of what they have built up and present it to potential buyers," Aufseeser says.

The prepaid market has become far more complicated through regulations and compliance issues, making it more difficult for a small company, entrepreneur or celebrity to suddenly create a prepaid card that would have staying power, Aufseeser says.

"I think you will still see well-known names and co-branded cards, but I think those celebrities will be going to an existing prepaid card company to develop a card with that person's name on it, rather than starting from scratch," she adds.

Celebrities have indeed had a rough time in the prepaid card market. The Kardashian sisters saw their 15 minutes of prepaid fame vanish as soon as their card launched; Magic Johnson is promoting his second prepaid card, after a card he promoted in 2004 proved short-lived. 

Prepaid card marketers will enjoy a boost through technology, the report says. The popularity of remote deposit capture for other banking products could transfer to prepaid products when banks ensure a deposit is credited to an account as quickly as possible. 

In addition, use of an ATM as a distribution channel for prepaid cards opens the doors as a new funding source for issuers. 

The report outlines various recommendations to further strengthen the prepaid market.

The report recommends that Discover Financial Services should buy NetSpend "to capitalize on the processing platform and the program management expertise" of the companies. As such, NetSpend would become part of a three-party network and be exempt from Durbin interchange caps.

Total System Services Inc. should buy Green Dot and either InComm or Blackhawk Network to add a bank, a portfolio, program management skills and distribution capabilities, the report suggests.

Prepaid companies are already aggressively pursuing partnerships. NetSpend has recently announced deals such as one with Intuit Inc. to handle tax refunds for TurboTax users on prepaid cards, and another deal with SCVNGR's LevelUp to promote its mobile payment system among prepaid card users. 

Aufseeser compiled the report from information and data collected this year between June and October from more than 125 interviews with industry leaders representing more than 50 companies that either offer or support prepaid debit and payroll programs. The report did not include data related to closed-loop or single-load prepaid products, nor did it include payroll card products such as health savings accounts or flexible spending plans.

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