Are Prepaid Cards an Emerging Threat to Traditional Banks?

According to a brand new report published by Mintel, the recent increase in dissatisfaction with banks, the expanding number of unbanked and underbanked households and the increasing cost of basic banking are all contributing to a growth in the prepaid card market as an alternative to the traditional checking account.

What should be disconcerting for bankers is that close to 20% of respondents overall stated that they would be interested in using prepaid cards to pay bills rather than using a banking account, with 25% of households earning more than $100K per year showing an interest. The primary reason for this interest was to avoid overdraft and other types of fees.

According to Susan Menke, Ph.D., vice president and behavioral economist at Mintel Comperemedia, this is significant since this potential movement to less traditional ways of banking greatly expands the potential market for prepaid cards beyond the unbanked and underbanked to include the very lucrative mass affluent market who may just be tired of being nickle and dimed.  According to Mintel, approximately 60% of those surveyed said they would be interested if a rebate or cashback were offered for using the prepaid card and that seven in 10 would find purchase discounts at merchants to be an attractive offer.

These trends are reinforced by a report from MasterCard that found that U.S. consumers loaded their plastic with around $120 billion in 2009 and that the load amount could reach well over $440 billion by 2017. Visa also announced yesterday the first phase of a national marketing campaign to raise consumer awareness about the benefits of using reloadable prepaid debit cards instead of cash for purchases.

Research by the Mercator Advisory Group, however, still shows that the majority of consumers do not make full use of the opportunities provided by prepaid cards. Their 2009 study documented the fact that only a very small number of the unbanked and underserved had purchased or reloaded a general purpose reloadable prepaid card in the last 12 months, demonstrating that the industry has a significant opportunity to more strongly communicate the benefits of prepaid cards to consumers.

With these trends as a backdrop, should bankers become more concerned with the Walmart MoneyCard that currently is providing a 1% cashback for gas purchases? It was also learned a couple weeks ago that Walmart had taken an equity interest in Green Dot Corp., a major player in the prepaid card industry and a key partner in offering prepaid card services to Wal-Mart’s customers. Green Dot is also planning an initial public offering and just happens to be in the process of buying a bank.

Wal-Mart already aggressively courts customers' pocketbooks, partnering with financial services companies to offer money transfers, check cashing and bill payments to more than two million customers. Wal-Mart also has opened its 1,000th "Money Center" and has announced that it planned to expand this concept to 500 more stores. It also has launched a Wal-Mart credit card in Canada, where it received a banking license just last month. While officials at Wal-Mart continue to deny any desire to fully enter the banking industry in the U.S., nothing is definite.

“There are a number of trends that appear to be springing out of dissatisfaction with the banking system, and the use of prepaid cards could be indicative of a larger trend – that customers are becoming more open to using new or unfamiliar methods for conducting their transactions,” according to Susan Menke from Mintel.

There is some good news for banks, however. Only 3% of survey respondents say they would prefer to have their salary loaded on a prepaid card rather than direct deposit to a bank, cash or a check.

But how much of a leap is it for a consumer to get angry enough at charges they never saw with free checking to look for alternatives for their basic banking needs? How is your bank serving the unbanked and underbanked market that may quickly expand to the mass affluent market if fees, charges and stipulations for basic banking continue to increase?