Philly FRB Examines "Cost Hurdles" to Increased Acceptance of Prepaid Cards

The Payment Card Center at the Federal Reserve Bank of Philadelphia has released a discussion paper entitled General-Use Prepaid Cards: The Path to Gaining Mainstream Acceptance. Authored by James C. McGrath, this though-provoking paper examines the prepaid card market, where it works, where it hasn't been as successful, and offers some ideas as to particular applications have fallen into the second category rather than the first.

Clearly, general-use prepaid cards show promise, both to reduce costs and inefficiencies in existing applications and to provide cost-effective and flexible financial service alternatives to a large market of underserved consumers. At the same time, they face some unique challenges that must be addressed as the product matures. Some of these challenges stem from the newness of the product: Consumer protections and regulatory oversight remain in the early stages. Other gaps pertain more to the business model. For example, while prepaid cards may provide attractive options to many paper-based applications, many programs are themselves quite complex and costly and require operational and technological sophistication. Last, some functional limitations need to be addressed in order to improve usability and spur adoption.

The paper will address these challenges in turn. First, it will note the perceived vulnerability of prepaid cards to money laundering and will discuss other relevant regulatory issues. It then examines the profit function within the business model, looking at factors affecting costs and revenues. Finally, it addresses two issues that may accelerate consumer adoption: payroll card portability and improved and extended reloadability options. Generally, the paper finds that initiatives are already underway or that others likely to be implemented will address many of these challenges. Doing so should strengthen the value propositions underlying a number of the product applications discussed and lay the groundwork for future prepaid innovations.

This paper follows on a paper released by the PCC last month which examined money laundering risks associated with prepaid cards: Prepaid Cards: Vulnerable to Money Laundering?