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The need for flexibility, foresight in the prepaid card industry

Jun 10, 2013 Dave King

Recent economic hardships, especially the financial fallout that occurred only a few years ago, have led to major shifts in the banking services market. One of the biggest factors has been the consistently increasing population of unbanked and underbanked households in the United States, while these demographics seem to prefer prepaid cards and other electronic payment methods over the use of traditional bank accounts.

The latest data from the Federal Deposit Insurance Corporation revealed that roughly 8.2 percent of U.S. households were entirely unbanked in 2011, while other reports suggest that this rate has increased throughout the past two years. What's more, 20.1 percent, or more than one-fifth of the U.S. population, is considered underbanked, as they lack the majority of traditional bank account services.

Several studies have revealed that underbanked and unbanked households, as well as those with teens, are among the biggest drivers of prepaid card popularity in the U.S. and abroad. However, companies entering the prepaid card arena need to ensure that they are separating their services from those of traditional bank providers, such as debit and credit card accounts.

Avoiding future walls
American Banker recently reported that the prepaid card industry might begin to run into issues should vendors allow their services to mimic debit card accounts. According to the news provider, the early years of prepaid card popularity have been very similar to the beginning of debit card accounts, and several trends are already beginning to emerge.

For example, regulators are more interested in passing more legislation to oversee operations and practices in the prepaid card sector. Banks are also increasing efforts to develop prepaid card products that stand separate from their traditional services. The source explained that the industry is still very distinct from the debit card and credit card account sectors, but vendors need to ensure that they continue to create novel offerings to sustain growth.

American Banker posited that many of the growing challenges facing the industry might in fact be the result of the extreme distance vendors have put between their products and those of traditional financial services. However, the industry's popularity among unbanked and underbanked households indicates that this separation might have been a vital driver of prepaid's growth throughout the past several years.

What has become clear is that vendors need to think outside of the box when developing prepaid cards and be savvy in the marketing process. Minimizing fees, providing plenty of flexibility and offering the support structures most traditional banking services providers would will make for an even more effective launch of a prepaid card program.

Governments also jumping in
The Center for American Progress reported last month that the U.S. government is working to become completely cashless, as officials believe that this process will improve efficiency among the various departments. According to the source, the Government Accountability Office believes that the transition to prepaid cards in place of paper checks, as well as other electronic initiatives, will save the public sector $1 billion through the next decade.

There are a variety of benefits beyond simple expenditure reductions that come along with prepaid cards, such as the ability to centrally manage accounts and thus decrease the risk of fraud and loss. The source added that the popularity of prepaid has become clear to state governments and enterprises as well, as many have taken similar measures by launching electronic transaction strategies.

The Center for American Progress added that one of the hopes many experts have is that prepaid cards will begin to cure the relationships between financial services providers and much of the U.S. population, which were largely hindered during the financial crisis.