The Specter of Regulation Haunts the Prepaid Market

Open-loop financial-services prepaid cards will be one of the fastest-growing segments for prepaid over the next two years, predicts the “12th Annual U.S. Prepaid Cards Market Forecasts, 2015-2018,” recently released by Mercator Advisory Group Inc.

The report, which gauges the growth potential of both open-loop and closed-loop prepaid cards, also says two other segments will be among the fastest-growing over the next two years: cards for open-loop flexible spending and health-savings accounts and those for digital media.

Overall, Mercator is forecasting that open-loop prepaid cards—otherwise known as general-purpose reloadable (GPR) cards—will have a compound average annual growth rate of 7% through 2018, eventually totaling $343 billion in loads.

“GPR card loads slowed down in the past year, but they are still fast-growing,” says Ben Jackson, director of Mercator’s Prepaid Advisory Service.

The outlook for closed-loop prepaid cards calls for a 3% compounded average annual growth rate and a total of $372 billion in loads. “Gift card growth had a dip a year or two back,” Jackson says. “It’s come back. The retailers have stepped up their marketing of the cards and are thinking of gift cards as strategic and relationship tools.”

But looming over all prepaid cards is the specter of new federal regulation. “The real question now is what’s going to happen with the Consumer Financial Protection Bureau regulations,” Jackson says. (For more on Jackson’s thoughts regarding regulation, see “How Regulation Will Reshape the Prepaid Game”).

The federal agency in 2014 issued 870 pages of proposed prepaid card regulations, but has yet to act on them. Jackson says that action could come within the next three months.

“[The new rules are] supposed to come out any time, but it looks like it will be later in the first quarter,” he says. “We’ll have to see what happens.” The prepaid card industry may completely change, or, if the CFPB relents some, it may continue on close to its current growth model, he says.

In their current form, the regulations would require so-called “Know Before You Owe” disclosures and aim to improve consumers’ access to account information. They also would create error-resolution procedures and provide protections when cards are lost or used fraudulently, according to the CFPB, a creature of the 2010 Dodd-Frank Act. The CFPB also plans to strictly control credit products linked to prepaid card accounts.

2016 will be a year involving a lot of watching and waiting for the prepaid card industry, Jackson says, something it will share with many other businesses as they consider the effects of the pending general election, pending regulation, higher interest rates, and general turbulence in the world.

“It will make some people cautious on their investing strategies,” he says, but others may see opportunities.

—Kevin Woodward