Viewpoint: The Future of Prepaid: Four Trends and Four Predictions

By Thea Garon, Center for Financial Services Innovation

 The prepaid card industry is at an inflection point. Over the last few years, the industry has changed dramatically. Fees have come down, functionality has gone up, and prepaid cards are by and large high-quality products that enable cardholders to spend wisely, save and plan for the future.

The Center for Financial Services Innovation (CFSI) recently released its 2016 Prepaid Industry Scorecard, which assesses the quality of the prepaid industry through the lens of the Compass Guide to Prepaid. The industry received an A- for Core practices (basic standards for a high-quality prepaid card), a B for Stretch practices, and a B- for Next Generation practices (best practices for providers looking to go beyond the basics). The industry’s Core and Stretch grades did not change from 2014, but the industry’s Next Generation grade increased from a C- to a B-.

CFSI also found four key trends that are shaping the industry:

1. Easier loading and unloading—Cardholders now have multiple, affordable ways to load and withdraw funds from their cards.
2. More transparent and supportive fees—Prepaid programs increasingly are communicating costs in clear and easy-to-understand ways, helping users avoid unnecessary fees and select a card that best meets their needs.
3. Increased personalization—Many prepaid cards now enable users to customize their experience, offering a variety of account plans and customizable alerts and notifications.
4. Enhanced functionality—Additional features, such as companion cards, budgeting tools and savings platforms are making prepaid cards versatile financial tools that help cardholders build and sustain financial health.

It’s clear how the industry has changed in recent years; what’s less clear is how the industry will change in the years ahead. Here are a few predictions on the trends we think will shape the industry:

1. Consumers with bank accounts—particularly millennials—increasingly will turn to prepaid cards to spend, save and manage their money. These individuals currently represent the fastest-growing segment of prepaid card users.
2. The distinction between prepaid cards and traditional demand deposit accounts (DDAs) will continue to diminish, as the functionality of these two products converges. Consumers will not differentiate between prepaid cards and checking accounts; they simply will select the best product that meets their needs.
3. The CFPB’s industry-wide regulations will spur innovation by establishing “rules of the road” and providing regulatory clarity, which has been missing from the industry in recent years. The CFPB’s regulations restricting overdraft should encourage prepaid providers to pursue new and innovative forms of offering credit that are potentially offered separately from the card itself, as Green Dot has done with Green Dot Money, its online lending marketplace.
4. Prepaid cards increasingly will serve as the infrastructure underlying fintech innovations. Because of their flexible nature, prepaid cards will be the technology of choice for innovators looking to store and move funds across platforms.

One thing is certain, though: Through our Prepaid Industry Scorecard and one-on-one assessments with providers, CFSI will continue to be at the forefront of prepaid providers’ efforts to offer products that help users build financial health. We’re also hopeful that regulatory certainty will help the industry move beyond the Core and Stretch practices to push further into the Next Generation practices that will make the products even more beneficial to consumers.

Thea Garon is a manager at CFSI, conducting research to monitor and analyze emerging trends in the financial services industry and shares CFSI’s expertise with internal and external stakeholders in the sector. She can be reached at [email protected].

In Viewpoints, payments professionals share their perspectives on the industry. Paybefore presents many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.