CU360 Article: Prepaid Cards Gaining Visibility

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Prepaid Cards Gaining Visibility

Three key steps are necessary to win greater industry acceptance

March 2, 2006

Analysts are taking a fresh look at prepaid cards following a January report from the Federal Reserve describing positive experiences in the wake of hurricane Katrina.

As the Fed paper points out, payment cards are safer than cash to carry around and cheaper and faster than checks to produce and get to recipients. It also cautions that emergency prepaid card programs can be vulnerable to fraud.

Consumers are increasingly choosing electronic payment tools over checks. Prepaid cards can attract and assist underserved consumers cost-effectively with a product more responsive to their needs than a traditional checking account.

The underserved, particularly the young, have been early adopters of prepaid technologies, which offer opportunities to bundle daily transactions with saving and credit-building features.

But executives at many financial institutions are still uncertain about prepaid cards due to lack of standardization, an unclear business case, and regulatory uncertainty. For many of the same reasons, lawmakers, consumer advocates, and consumers also have a hard time trusting prepaid cards and the companies offering them.

To overcome this resistance, the Network Branded Prepaid Card Association, open for business and recruiting members since January, may help. The group is the brainchild of its chairman, Anil Aggarwal, chief executive of the leading prepaid processor TSYS Prepaid.

Last fall the association held meetings across the country to build support and solicit input. Ideas were plentiful but varied widely, an indication that bringing the increasing number of prepaid products, functions, and companies under one umbrella will be a challenge.

The organization lists steps the industry must take to be treated seriously. Three stand out:

Standardize terminology. Experts can hardly agree on whether to call these products prepaid or stored value, though the name of the association may put that debate to rest. A common language is crucial to informing lawmakers, advocates, and consumers about prepaid cards.
Produce reliable market data. Consultants and analysts have churned out research on its size, growth, and potential, but few in the industry believe they can rely on the numbers. The association intends to collect meaningful data from its members to give all stakeholders a clear picture of where the industry is headed—an essential underpinning for the success of individual firms.
Establish best practices. As the association notes, consumer advocates are growing increasingly skeptical of prepaid cards. Though better nomenclature and data could help, they won't deal with the bad apples that charge exorbitant fees, lack pricing transparency, or provide substandard consumer protections.

Prepaid cards can help financial institutions reach new customers on mutually attractive terms. Consumers can get immediate liquidity, no overdraft charges, and the ability to make financial transactions anywhere, anytime. The institutions get to say yes more often, with less risk and the prospect of cross-selling later.

The Katrina Experience

Although post-Katrina reports indicated confusion during card distribution, as well as some inappropriate transactions, many of the stories were probably overblown. On the positive side, prepaid cards offer the following:

They're more secure than checks. Recipients need not cash the entire amount at once, and are personally safer carrying a card rather than large amounts of cash.
Cards get money quickly to the people who need it. With portable cards, Katrina victims were able to use them all over the country at POS terminals and ATMs.
Cards lend themselves to instant issuing, similar to debit cards provided with a new account. They are cheaper than checks and convenient for consumers.
In flood and hurricane damage areas, waterproof cards have one more advantage over paper instruments. And in case of power outage, merchants can use manual devices to process offline card transactions.