Prepaid cards make up a large segment of the payments market and provide a vital service for under-banked users. With a pre-determined balance, prepaid cards provide a key spend management tool without the need for a bank account. It’s the low tech fintech that has been a lifeline for many people – and it shows no signs of slowing down. During our current economic climate, with inflation creating a difficult cost of living crisis for millions around the world, access to budget control tools is more important than ever.
As we celebrate 50 years since the first appearance of the prepaid card – let us consider the enduring popularity of this payment method as it reaches a new audience through digital innovation and mobile phones.
The rise of the prepaid card
Prepaid cards were first introduced in the UK in the 1970s to replace coins used in phone boxes, allowing call operators to reliably connect international calls without the reliance of customers having a large number of coins in hand. The use of prepaid cards to improve legacy services spread quickly, with stores offering gift cards from the 1980s. The benefits of this approach were clear – businesses were able to assure future revenue and consumers had an extra gift option (one that helped them to control their spend).
The general-use prepaid card market emerged from the success of the gift card; consumers enjoyed the pay-now-buy-later approach and even governments evolved in the rise of the prepaid card. In the early 1990s, European states replaced food stamps with a prepaid card redeemable at a wide variety of merchants. The prepaid card also allowed consumers to load a purchased card without the use of a bank account, enabling underbanked and unbanked consumers to use a debit card.
Prepaid’s popularity can also be explained as a reaction to the growing card payments industry. As credit card use exploded throughout the western world, consumers were left wanting the finality of traditional physical money – once you have spent the cash, more is not instantly available.
The general prepaid card has continued to evolve through the use of digital prepaid cards as part of a consumer’s e-wallet. Alongside the rise of the general prepaid card, the buy-now-pay-later (BNPL) model has also seen impressive adoption. BNPL involves providing short term loans to cover purchases, with steep interest rates if a payment is missed. BNPL has its own set of benefits – allowing consumers to easily bridge the gap between their pay-day and daily spending needs, as well as providing an immediate credit facility. However, the BNPL industry has also allowed large quantities of debt to pile up due to high interest rates, and often hinders consumer’s efforts to control their spending.
The last decade has seen a large focus on BNPL providers, with unicorns such as Klarna seizing a large chunk of market share – in the last two years, the BNPL market has seen a CAGR of 227%. However, estimates indicate that the next decade may be seized by the general prepaid card. As we enter a new recessionary period, general prepaid cards will present a useful spend management tool for consumers to manage the impending cost-of-living crisis, and consumers are likely to become wary of using high-interest BNPL services. During the 2009-2012 recession, use of prepaid cards (measured by number of transactions) increased by an annualised rate of 33.5 percent in the USA.
Prepaid card outlook
On the 50th anniversary of the prepaid card, the outlook for the growing industry is positive. In a recent report, the prepaid cards industry was predicted to grow at a CAGR of 9.4% from 2022 to 2028. One important factor of this positive outlook is the growing likelihood of high rates of inflation for the coming years, keeping consumers eager to manage their spending. Another important factor to consider is the strength of the general prepaid card industry – by focusing on serving the unbanked and underbanked sectors of the market, the general prepaid card industry has a large user base across all demographics and locations, helping to underpin demand throughout the current recession.
Consumers are also turning to the general prepaid card market to safeguard their privacy. Data leaks in Q2 2022 increased by 43.5% year-on-year, causing many consumers to look for a better way to handle online payments. General prepaid cards provide consumers with a method of replacing card details regularly without incurring large charges from their bank/credit card providers. Also, the balance on prepaid cards is normally lower than that of a credit card or a bank account linked debit card, reducing the customer’s risk whilst using their card online.
Therefore, innovative fintechs providing general prepaid cards are well positioned to continue to disrupt the global digital payments industry, with a more detailed focus on consumer safety and spend control. Fintechs continue to provide new methods of controlling spending and purchasing anonymously online and will continue to attract new consumers. Prepaid cards are currently having a moment, and this moment won’t stop anytime soon.
Günther Vogelpoel is CEO, Recharge.com