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Market for prepaid cards changing

Apr 02, 2013 Sean Albert

Market for prepaid cards changing

Traditional banking services don't work for everyone. Today, there are many Americans who eschew standard banks due to a variety of circumstances, including low income levels and personal preferences. However, the picture of unbanked and underbanked individuals in the United States is rapidly changing, and this may have a major effect on the market for prepaid purchase solutions, including technologies like ACH cards. Alternatives may be beginning to enter the mainstream, and providers should pay attention.

Young consumers embrace alternative methods


In a recent podcast, PYMNTS.com interviewed Discover senior vice president of global marketing and solutions Beth Horowitz to get her take on the future of prepaid cards. She has observed the market for ACH cards and other similar tools changing to include populations that may not have previously flocked to these services.

"It's not the typical profile or the perception that we in the industry have been looking at with prepaid for the last decade or so," Horowitz told the news source. "According to Aite, 45 percent of the population that has opted out of traditional banking is the Millennials. That number goes to 27 percent for Gen Xs and 28 percent of Baby Boomers. That's a lot of people who are opting out and choosing new forms of payments."

Horowitz further noted that this new demographic is a big one - Millenials alone account for around 80 million individuals. One major factor facilitating this move is that a large swatch of this demographic is college-educated. In many cases, people in this population got their first exposure to prepaid solutions while they were away at school, as many universities offer such tools as part of a meal plan or student loan program. Students are often given a card to access all of their funds in one place, and in some cases they can even use them out in the community. This can be helpful in keeping budgets in check, and Horowitz noted that it also means recent graduates may be most comfortable keeping these money management strategies as they enter the real world.

Compounding this desire to use prepaid solutions may be the economy, Horowitz explained. With many Millenials either out of work entirely or struggling to find more than a part-time position, they are in great need of budgeting tools to help them manage their finances. Portability also plays a role - members of this population tend to continue their education or actively job-search, and this may lead to picking up and moving to where the best opportunities are. It can be a hassle to change banks, but payment options like ACH cards don't come with this problem, Horowitz pointed out. By striving toward innovation, providers may be able to harness these needs to both help consumers and increase business success.

In a 2012 study, Think Finance also found that 20-somethings are embracing non-traditional banking services, and even across tax brackets. Many reported positive experiences with short term lending, a service which 22 percent of those earning between $50,000 and $74,999 had used, compared to 15 percent of those making less than $25,000. Additionally, 51 percent of those in both income ranges had used prepaid cards. Rent-to-own stores, as well as money transfer and check cashing services, also proved popular.

But what about credit?
While Millenials may now make up a significant share of the market for prepaid solutions like ACH cards, this doesn't mean they're necessarily building up their consumer credit reports. Millenials may also be the next big market for alternative credit score providers. By using data such as an individual's history of paying rent on time, lenders may find that some young people who don't use traditional banks are actually strong loan candidates. Making these options available to young consumers may serve a variety of businesses well.