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Prepaid cards continue to convert traditional bank account holders

Jun 10, 2013 Dave King

In recent years, prepaid cards have become increasingly popular among a variety of demographics, especially younger individuals and those considered unbanked and underbanked. As a result, more organizations are launching initiatives to capitalize on the perceived preference of prepaid cards over traditional bank accounts.

All types of electronic payment markets have experienced significant financial gains in the years following the Great Recession, though many are brand new. Prepaid cards, however, have been around for decades, though they only recently became a worthy adversary of credit card, debit card and checking accounts. Many analysts believe that this growth is the likely result of the financial crisis, which led many American households to avoid the nation's biggest banks.

Checking accounts antiquated?
FOX Business recently reported that prepaid cards are beginning to dominate the financial services sector, and will likely continue to do so for the foreseeable future. According to the news provider, recent data from the Federal Reserve indicates that roughly one-fifth of the American population is considered underbanked, and this proportion continues to grow with the passing of each year.

The source explained that the financial services market segment at the greatest risk of falling to the prepaid card industry is free checking accounts. Though these were widely popular for a number of years, consumers interested in these accounts have become increasingly turned off by the extensive hidden fees, especially when they sign up under the assumption that there will not be charges levied.

Prepaid card providers, on the other hand, continue to cut fees, especially those from the earliest entrants into the industry. FOX Business explained that one study from Javelin Strategy projects the volume of funds loaded to increase by 37 percent between last year and 2017, when the industry will hit just shy of $139 million in net worth.

Though this is a far cry from the money currently deposited into checking accounts, trends indicate that prepaid will continue to take up larger market segments over time, and potentially trump checking accounts within the next decade or so.

Competition in the prepaid market has been responsible for the massive growth in popularity, as the news provider cited the lack of several fees from some of the biggest providers of the cards. Now, smaller organizations are also beginning to compete with the giants of financial services, specializing only in prepaid cards rather than offering a variety of products.

However, many analysts believe that the industry runs the risk of becoming more like traditional banking services, which would hinder growth.

Alternative, not a carbon copy
The Christian Science Monitor recently listed several ways in which the prepaid card industry diverges from the services offered through traditional banking institutions. According to the source, prepaid cards have separated from checking accounts through the minimization of fees, while debit card holders seem to be experiencing increases in the charges levied.

Prepaid card providers should ensure that their services are completely separate from those of financial institutions to yield consistent growth among the demographics that most prefer these products.