The reloadable prepaid card market managed to break free from the regulatory grip of the Durbin amendment in the final version of The Restoring American Financial Stability Act of 2010.
Government entities that distribute benefits through prepaid debit cards are exempt from impending debit-interchange rules yet to be set by the Federal Reserve Board. Issuers of reloadable prepaid debit cards, popular among financially underserved consumers, also are exempt if they meet certain criteria, such as not imposing overdraft fees and enabling cardholders to conduct at least one free ATM transaction per month.
On the whole, the reloadable prepaid debit card market mostly will benefit from the exemption, observers agree. To what extent, however, remains to be seen until the Fed sets debit card interchange rates next year.
“If debit interchange is significantly reduced, then prepaid will have a meaningful economic advantage, at least in terms of interchange revenue,” says Joshua Gilbert, a senior manager at First Annapolis Consulting in Linthicum, Md.
But if the Fed’s guidance results in a more-modest rate reduction, then prepaid’s advantage will be small, Gilbert adds.
Until the Fed decides debit’s fate, observers can only speculate on the positives, negatives and unintended consequences the legislation might have on the reloadable prepaid card market.
Multiple industry reports have concluded that the reloadable prepaid sector is growing, and banks that ignore this trend are missing out on another potential revenue source.
Indeed, the total value loaded annually into network-branded prepaid debit card accounts in the United States could reach $440 billion by 2017, a Boston Consulting Group report released in July predicts.
And just the combined volume of reloadable prepaid debit and payroll cards could reach $164 billion in the U.S. by 2014, up from just $44 billion in 2009, a September Aite Group report concluded, urging financial institutions to least explore this market.
Companies such as Green Dot Corp. and Meta Payments Systems are at an all-time high in terms of active reloadable prepaid debit cards. As of the end of December, Meta had 22.7 million active cards in circulation. Green Dot as of the end of July had 2.2 million active cards.
More large financial institutions likely will begin to explore the reloadable prepaid card market as a way to make up for lost revenue because of reduced debit-interchange rates, observers believe. That, in turn, also should help bring more awareness to the product.
Beth Robertson, director of payments research at Javelin Strategy and Research in Pleasanton, Calif., believes banks may push reloadable cards to select customers who already have a checking account but encounter multiple overdrafts and keep low balances.
Prepaid “might turn to be a more valuable vehicle for the [bank] relationship or building a relationship with those customers,” she says.
The prepaid card still would give banks the opportunity to cross-sell other products, such as home loans or savings accounts, to a particular cardholder, says Ben Jackson, a senior analyst with Mercator’s prepaid advisory group.
“It used to be that the checking account was the beginning of a whole series of products for banking customers,” he says.
If banks forgo the traditional checking-account structure with certain customers, then they have to decide how to rebuild that “cross-sell business,” Jackson adds.
Should the major banks choose not to offer reloadable cards, consumers weary of checking-account fees might turn to prepaid on their own, contends Todd Ablowitz, president of Double Diamond Group, a Centennial, Colo.-based consulting firm.
“I’ve always subscribed to the idea that bank fees would push people to reloadable prepaid,” he says.
The right reloadable card “is a much better product for [the financially underserved] than the checking account” because of monthly maintenance and overdraft fees, he says.
Innovation in the prepaid market also should grow in the aftermath of the debit-interchange exemption, observers agree. Pricing changes and enhanced features already were happening before regulation.
In the past 16 months, multiple providers such as Wal-Mart Stores Inc. and NetSpend Corp. announced reduced purchase and reload fees, while H&R Block Inc. and Meta Payment each offer a line of credit associated with a network-branded prepaid debit card. And most prepaid cards come with standard phone text-message alerts with purchase and balance information after each transaction.
“In some cases, a person who loses a free checking account kind of gets an upgrade with the features available to them on a prepaid card,” Jackson says.
Philip Philliou, a payments-industry consultant and managing director with Philliou Selwanes Partners LLC in New York, believes innovations in mobile payments also will better position the reloadable prepaid card as a mainstream product.
Contactless mobile payment is picking up momentum in light of recent announcements by the card brands and telecommunication companies.
Visa Inc., for example, is pushing a microSD card, which consumers may install in the memory slots found in many phones. And AT&T Inc., Verizon Communications Inc. and T-Mobile USA are said to be working with Discover Financial Services and Barclays PLC on a mobile-payments model.
“If reloadable debit finds a way onto that chip” it gives the product a bigger boost, Philliou says.
One of the lesser-publicized rules from the financial-reform legislation might end up having an unintended consequence on reloadable prepaid, Ablowitz says. The law includes a clause barring issuers from requiring transactions be routed across a single network or over multiple networks controlled by the same company. For example, a Visa-branded debit card could not also contain just Visa’s Interlink point-of-sale and Plus ATM network marks on the back. It would require also having at least one competing mark, such as First Data Corp’s Star or Discover’s Pulse.
Reloadable prepaid cards are not exempt from this regulation, Ablowitz says.
Selecting a PIN-debit brand adds costs to the issuer or program manager “to go through a selection process and put that brand” on the card, Ablowitz says. And “you can bet the PIN-debit brand will offer a lower interchange [structure] than the brand on the front.”
That, in turn, means less profit for the issuer or program manager because most prepaid programs are focused on signature-debit transactions, Ablowitz says.
Losing revenue on interchange most likely will play out at merchants that practice PIN-steering at the point of sale, routing transactions through the least-expensive network.
“The question of ‘credit or debit’ is really false because you’re really asking [signature] debit or [PIN] debit” when a consumer pays with a debit card,” Ablowitz says.
The thought cash once again will become a primary payment method in the wake of the financial reforms has met with some disagreement among industry observers.
Some gas stations already had offered cheaper fuel prices on cash payments before the legislation. “If [retailer’s] start to favor cash for whatever reason, cash may become a lot more important,” Mercator’s Jackson says.
That, in turn, “could reduce the profitability of prepaid cards if the prepaid issuers, processors and managers aren’t colleting the interchange,” he adds.
And if banks decide to forgo debit cards altogether and just issue an ATM card for cash access, that ultimately gives cash more power and lessens the impact prepaid debit cards would have at brick-and-mortar stores, Jackson says.
Others disagree on cash’s potential comeback.
“There are going to be lots of things that are positive and negative about the impact of financial regulation, but the bottom line is that people are not moving back to cash,” Double Diamond’s Ablowitz says, citing consumers’ payment preferences, especially for younger generations. “Ask a [consumer] under the age of 25 if they are carrying cash on them,” he says.
Philliou also believes merchants will not be so quick to offer cash discounts because they still realize the convenience electronic payments bring to themselves and consumers. The findings of a recent Javelin survey, however, suggest that 26% of consumers are paying for purchases with cash compared with 28% with credit and 37% with debit.
Another unintended consequence is the potential for issuers to find a way around new regulations, Javelin’s Robertson says.
Hybrid payment options combining exempt general-purpose reloadable debit cards with traditional debit cards could surface, Javelin suggested in an August report.
But Javelin warns that the new consumer watchdog agency likely would frown on any attempts to flout the new regulations.
Ongoing regulation in the card industry “continues to disrupt [business] models,” Robertson says. The regulations “provide an incentive for people to look at innovative ways to structure a product that may avoid some of the regulations in some ways, but also meet customer needs in a different or better way than previously,” she adds.
As banks wait for the Fed to determine new debit interchange rates, First Annapolis’ Gilbert suggests they prepare multiple business models as a precaution.
“Banks are going to think long and hard about how to add prepaid to their retail product mix to both gain customers and enhance profitability,” he says.