Banks Comfortable with Prepaid Cards–Possibly Too Comfortable

Financial-institution issuers of prepaid cards usable on general-purpose payment networks such as Visa and MasterCard are making money, but they may be missing opportunities by not exploring new market niches or checking out networks other than the one they already use. Those are some of the findings released Monday from a recent survey of prepaid card issuers by Boston-based Aite Group LLC. Aite's survey pool was only nine financial institutions, a pool too small to generate statistically reliable inferences for the entire banking industry. Nonetheless, the findings, mostly obtained from the executives who headed their respective institution's prepaid programs in 2007's second half, provide some good insights into bankers' strategic decision making, says Aite research director Gwenn Bézard. One of the key insights was that bankers stick with what they know, such as the network on which their institutions issue credit and debit cards. Seven of the surveyed financial institutions issue Visa-branded prepaid cards, two issued MasterCard cards, and only one issued Discover-branded cards. None issued American Express Co. cards. Eight out of the nine issuers were unable to comment at all about what two major electronic-funds transfer networks, Metavante Corp.'s NYCE and First Data's Star, offer in the way of prepaid card services. But because of the heated competition between networks for prepaid card transaction volume, issuers may be missing out on revenue or marketing opportunities by not doing “a full-blown review” of what other networks offer, according to Bézard. “They're defaulting on the path of least resistance,” he tells Digital Transactions News. Financial institutions also tend to issue only a few products in the prepaid space. Several of the issuers specialize heavily in gift and incentive cards. The other major types mentioned were health benefits, payroll, government programs, and general-purpose spending. “This means issuers' expertise in the prepaid space tends to be narrowly defined,” the report says. “It also means that banks in practice shun most of the branded prepaid products supported by major card brands.” And only 23% of seven responding institutions' cards were reloadable. While they're playing a conservative game, most financial institutions seem to be making money with prepaid cards. Sixty-two percent of eight respondents said they were “satisfied” or “definitely satisfied” with their card programs' financial performance. Thirteen percent were neutral, while 25% were “not satisfied” or “definitely not satisfied.” Meanwhile, based on results from all nine surveyed institutions, 67% cited regulatory pressures as “important” to “very important”?tops among a dozen possible threats to their programs. A number of states have imposed or are considering restrictions on prepaid card fees, redemption time limits, or other policies. Separately, Atlanta-based Synergistics Research Corp. on Monday said that although only 1% of nearly 800 lower-income consumers it surveyed have actually bought the new Wal-Mart Stores Inc. MoneyCard prepaid card issued by General Electric Co.'s GE Money subsidiary, the potential for Wal-Mart to become a major alternative financial-services provider is still very strong. One reason: These consumers visit Wal-Mart on average 4.8 times per month compared with 2.8 times for banks. Wal-Mart last year withdrew its controversial bid for a Utah industrial bank. “The potential for a retailer such as Wal-Mart to make inroads into financial services by offering an alternative to a traditional checking-account relationship with a prepaid card product may at first appear to be very limited,” Synergistics chief executive officer William H. McCraken said in a statement. “However, this must be interpreted in the context of the frequency with which Wal-Mart is visited and the significant minority who currently use the services of non-bank in-store financial centers, most of whom have a very positive perception of them. From this toe-hold, a retailer such as Wal-Mart could very well build a significant presence as the primary financial provider of a sizable segment of lower-income households.”