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Checking vs. Prepaid Cards: Threat or Opportunity?

The prepaid card market has exploded almost overnight. Many banks are worried prepaid will cut into their checking business, while some are diving in with their own competitive prepaid offers. Others are sitting on the sidelines, unsure which side they’re rooting for and how they want to play the game.

Over the last three years, consumer ownership of prepaid cards climbed rapidly, and today over 13% of US adults now has a prepaid card. Between 2009 and 2012 consumer ownership of prepaid cards climbed 71%. And prepaid purchase volume is expected to grow from approximately $150 billion this year to nearly $200 billion in the next five years, a compound annual growth rate of 5.66%.

These findings are based on a study of more than 11,000 consumers conducted by Javelin Strategy & Research. The report, “Checking vs. Prepaid: Threat or Opportunity?”, evaluates market forces driving the expansion of prepaid products in the U.S. today, and compares key providers of prepaid products against the positioning of bank prepaid products, with breakdowns for key demographic segments.

“The dynamics of the card-issuing business and those of the banking industry have changed dramatically in recent years,” notes Aleia Van Dyke, payments industry analyst at Javelin. “An array of economic, regulatory, and governmental factors and initiatives have combined to drive expansion in the use of prepaid products.”

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Bank prepaid products are generally a lower fee option for consumers than basic checking. In a baseline scenario comparison that combined monthly fees and ATM access charges, the top retail bank checking account charges an average of $8.84 per month, while a bank prepaid card is just $6.89 a month. The average monthly fee for prepaid accounts from non-bank providers averages $11.02

Much like banks, prepaid cards are often maligned for having high fees, but some new products entering the market have proved otherwise. But if financial marketers think they can win the battle against prepaid providers by claiming the other guys have “outrageously expensive fees,” they had better think again. Prepaid products from newcomers like Chase with its Liquid card and the AmEx Bluebird Card have fee structures specifically designed to limit consumer costs. Bluebird takes the minimalist approach with a clean and simple list of fees, while Chase Liquid has pursued a model of fee transparency.

“Banks may find the optimal prepaid customer within their own walls as existing, underperforming checking account holders,” says Van Dyke. “Despite the newer opt-in rules, overdraft behavior is most likely to make checking accounts too expensive for some consumers, and prepaid options enable banks to retain customers in a manner that is more satisfactory and cost-effective for both parties.”

Javelin reviewed product and fee information from the following prepaid providers: BB&T MoneyAccount, Chase Liquid, PNC SmartAccess, Regions Financial Now Card, US Bank Convenient Cash Card, AccountNow Gold Card, Bluebird by American Express and Walmart, Kaiku Visa Prepaid Card, NetSpend FeeAdvantage Plan Prepaid Card, and Plastyc UPside Visa Prepaid Card.

The full report contains 38 pages and 25 graphs.

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  1. Bart Corredera says:

    Prepaid comapnies are working hard to make their prepaid card act like a bank account (see bluebird). Banks have bank accounts but are working hard to acquire prepaid cards. Dog chasing its tail. The main difference? Prepaid cards don’t have a credit check component where as most banks still have a credit check component to opening a bank account.

    Take a demand deposit account + Debit Card, remove the credit check component, default opt out (Dodd-Frank), set OD fee to zero, accept check deposits, no checkbook, add online/mobile access and you basically have a Prepaid Card. Of course Prepaid is Durbin free, well at least today anyway.

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