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January 7, 2014

US prepaid debit card realities: Aite

Interest and demand for prepaid cards in the US has increased over the past five years. The demand comes from a range of consumers across the income spectrum. Valentina Romeo examines the evolution of prepaid card consumer demographics

By Verdict Staff

Interest and demand for prepaid cards in the US has increased over the past five years. The demand comes from a range of consumers across the income spectrum. Valentina Romeo examines the evolution of prepaid card consumer demographics

Prepaid cardholder demographics have morphed over time from low-income, disadvantaged consumers to mainstream consumers.

As cardholder fees are decreasing, competition among big players in the industry continues to grow. Due to further pricing and regulatory pressures, the industry is going to experience a wave of consolidation.

"For a long time across the market place in the US, consumers, regulators, bankers and payment providers tended to believe that the target for general purpose prepaid cards was the under-banked and the light-banked population," says Madeline Aufseeser, senior analyst at Aite Group and co-author of the report Prepaid Realities: Cardholder Demographics and Revenue Models.

"We did a survey last spring and the results that came back suggested the average household income bracket of consumers who hold these types of products is actually very good. The average income is well above the national average in the US."

In the United States, adoption of general-purpose reloadable (GPR) prepaid debit cards increased by more than 50% between 2008 and 2013. In 2008, just 15% of US consumers owned prepaid debit cards. By 2013, that figure had increased to nearly 25%.

Aite says active prepaid cardholder numbers are expected to grow to over 20m consumers by 2016, up 56% from 2013.

Who are the prepaid debit cardholders?

Contrary to popular belief, prepaid debit cards aren’t just for consumers who can’t get a current account. A large majority (90%) of consumers who have a prepaid debit card also have a current account, the report says.

Furthermore, the adoption of prepaid debit cards is skewed toward younger consumers. A third of Generation Y’ers, 28% of Generation X’ers, 15% of baby boomers, and 7% of seniors have a prepaid debit card. Since 2008, adoption of prepaid debit cards has increased in all groups with the exception of the seniors. Also, by income level, prepaid debit card adoption is remarkably consistent, varying by just four percentage points across these categories.

The report also found a larger percentage of US prepaid card holders save more today than they did in 2010. 46% of prepaid card holders say they’re saving more by spending less, versus 38% of other consumers. One in five prepaid debit card holders save more because they put a larger portion of their income away, in contrast to 11% of other consumers.

Building revenue models

The report indentifies three different channel-based revenue models for analysing cardholders’ behaviour.

One of the primary distribution and acquisition channels is retail.

The retail channel yields different usage patterns based on the type of retailer selling the card.

Consumers who purchase cards off the shelf through mass-merchant retailers such as 7-Eleven, Walgreens, and Walmart, use their cards differently to those who purchase cards through check-cashing stores, such as Ace Cash Express, or through tax preparation stores, such as H&R Block and Jackson Hewitt.

As for the online channel, the report says providers apply different marketing tactics to promote their websites and products. It cites UniRush, which features a celebrity-endorsed product.

Bank-channel nuances generally gather around product positioning, the report shows. To promote their products, some companies such as US Bank and JPMorgan Chase use their bank branches. Other banks sell the product as an alternative to a current account instead.

Aufseeser tells CI: "We did another study on traditional debit cards in the US market, and we found that 50% of accounts are purchased in a branch. However, many accounts are opened through the Internet today, but when it comes to financial relationship, consumers still like to establish a relationship with a financial advisor."

"I don’t necessarily see the digital channel in the prepaid space surpassing the branch as a means to acquire consumers, but I probably see them working and growing together," she says.

Consolidation on the wayAufseeser says: "The prepaid product here has definitely matured and reached the mainstream audience. Consumers are adopting the product at a high rate, over 20% year-on-year.

"The market is reaching an inflection point from a maturity perspective and also from a provider perspective, because since last year, the number of providers who entered the prepaid markets has stepped up.

Since new big players have come to the market, competition has dramatically increased."

American Express with its Serve and Bluebird products and JPMorgan Chase with its Liquid card, are having a distinct impact on the industry’s pricing dynamics. Both have recently introduced cards with lower-market rates for cardholder fees like activation, monthly service, and reloads.

Aite Group expects prepaid debit card pricing to continue decreasing in the face of fierce competition.

Price reductions reduce revenue opportunities and squeeze margins, and this will cause some players to exit the market.

"We have seen quite a number of acquisitions in the prepaid space especially in 2012. What we often see is that there are companies that just do marketing. Some of them are going to leave the market because they don’t bring any other value to the equation," says Aufseeser.

"Payment providers are really great marketers, who focus on retention and usage in addition to acquiring customers. However, in the prepaid space, the providers have been primarily focused on acquiring customers for so long that they haven’t paid much attention to profiling these customers yet. They need to know how to retain them and get them to use the products more, and they have to get a lot more efficient to do this."

A MasterCard survey says the US represented around 75% of global opportunity in prepaid in 2010.

However, by 2017 the rest of the world will begin to catch up. In Europe, MasterCard estimates the prepaid market will grow by 27% to $149bn in 2017.

Despite promising forecasts, the prepaid space has not picked up yet outside of the US. Aufseeser concludes: "I do think the European markets will benefit on extending prepaid products, because not all consumers are able to afford a current account, so it will give the European banks an opportunity to expand their reach, just like in the US."

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