Fitch: Prepaid Card Volumes Rising as Payment Methods Evolve
CHICAGO--(BUSINESS WIRE)--Strong growth in the volume of U.S. consumer transactions conducted with prepaid credit cards is likely to continue, according to Fitch Ratings. The shift is partly driven by the popularity of gift cards, as well as a desire by consumers to more carefully manage their finances, as evidenced by meaningful deleveraging since the onset of the financial crisis.
According to the latest payments data provided by the Federal Reserve, general purpose prepaid card payments have been the fastest-growing noncash payment method in the U.S. for the last several years. Between 2009 and 2012, the number of prepaid card transactions grew by an annual rate of 33.5%, far outstripping similar rates for other types of noncash payment. The total number of prepaid card transactions reached 3.1 billion in 2012, 1.8 billion more than 2009. Private-label prepaid cards also posted strong growth, up 9.7% annually over the same period.
The growing popularity of prepaid cards is, in part, a consequence of the Durbin Amendment, which reduced the amount of interchange revenue earned by banks for debit card transactions. To help offset the revenue decline, many banks reinstituted fees on checking accounts and cancelled associated reward programs. The checking fees are burdensome to low-balance account holders, and many have closed accounts and looked for alternative banking products.
Prepaid cards have become a popular substitute for checking accounts and some banks have introduced products to target the large "under-banked" population. In October 2012, American Express teamed up with Walmart to introduce the Bluebird card; a low- to no-fee card, with no minimum balance requirements. At their recent financial community meeting, American Express indicated that more than $2 billion had been loaded on Bluebird cards since their launch, with 39% of funds coming from direct deposits in 2013.
Still, a large portion of prepaid cards continue to charge fees (e.g. monthly fees, ATM fees) and some come with expiration dates, which has garnered the attention of the Consumer Financial Protection Bureau (CFPB). According to its rulemaking agenda released last fall, the CFPB is targeting May 2014 for proposed regulation on prepaid cards.
Sen. Mark Warner, D-VA, recently introduced a bill that would require new disclosures for prepaid cards, including clearer fee tables. The bill would also require the CFPB to issue rules to standardize fee disclosures. The bill is focused on both reloadable and nonreloadable cards in excess of $250.
JP Morgan recently announced its intention to sell its prepaid card business. This is mainly due to higher perceived risk, but also because relationships with consumers are not direct and therefore harder to manage. It is possible that increased regulatory oversight could prompt more banks to rethink their strategy on prepaid cards and potentially exit the business. In this scenario, Fitch believes there are benefits for nonbank players such as American Express, Green Dot and NetSpend (a wholly owned subsidiary of Total Systems Services, Inc.).
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.