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?

2007 Mobile Financial Services Study

Edgar, Dunn & Company and Mobile Payments World have released their 2007 Mobile Financial Services Study which investigates mobile banking and mobile payments. The study is based on a survey of approximately 500 "thought leaders in mobile payments and financial services from around the world" (which means subscribers to the sponsors' publications).

When asked "which participants in the Mobile Payments value chain will be the most critical to the achievement of critical mass?" 70% of respondents said "merchants" and 65% said "consumers" with smaller numbers citing mobile carriers, financial institutions and handset manufacturers.

Respondents felt there was currently no "killer app" in mobile payments, but thought that transportation, micropayments and mobile wallets had the potential to achieve that status.

In terms of time frame, 60% felt mobile payment adoption would be "gradual" while 40% thought it would be "rapid."

CFSI Study on PrePaid Cardholder Spending Patterns

The Center for Financial Services Innovation and the Federal Reserve Banks of New York and Chicago released a new study entitled “Cardholder Use of General Spending Prepaid Cards: A Closer Look at the Market.”

The study gathered data from 4 card providers on approximately 2000 card holders. Some of the conclusions the researchers reached include:

1. Card holders spend almost all of the funds loaded on to a card each month
2. Point-of-Sale (POS) transactions significantly outnumber ATM transactions and card holders typically spend most of their money via POS
3. Fee structures and amounts, which had been quite variable, have become more consistent.
   

The paper also discusses which features (rewards programs, credit building, savings features) cardholders find most desirable.

The detailed statistical analysis combined with insightful analysis is a must read. To whet your appetite, I've borrowed a couple of interesting charts: