Prepaid Debit: The New Checking Account?
One of the more noteworthy developments in 2012 was the evolution of prepaid debit cards. Previously best known for their affiliation with b-list celebrities, prepaid debit cards attempted to become a little more mainstream with the introduction of cards from Chase, American Express, and Walmart. While these institutions attempt to shed the shadow cast by cards that charged consumers $99.95 a year just for the privilege of carrying a Kardashian in their back pocket, the two key strategic questions we’re typically hearing from community based financial institutions are:
- Do we need to follow in Chase’s footsteps and offer a prepaid card of our own?
- How big of a threat are these new prepaid cards to our traditional checking accounts?
Do you need to offer a prepaid debit card?
Yes, no, and maybe. How’s that for decisive? As with any product decision, it really boils down to your target demographics coupled with how it fits on the shelf along with your existing product offerings. There is a distinction between offering niche reloadable cards, or those that have a specific purpose such as an international travel card or gift card, versus cards that are positioned as a replacement or supplement to a traditional checking account. In the case of the latter, it’s a little more difficult to see where a prepaid card fits in the product menu for institutions still offering free checking. The fit is much easier to see in cases like the Chase Liquid prepaid card, where the card’s $4.95 monthly fee might be a very attractive alternative to the $12 monthly fee for customers unable to meet the direct deposit or minimum balance requirements on Chase’s base checking account. For Chase, they essentially found a less antagonistic $5 fee to help offset lost Durbin interchange income, something that Bank of America was desperately seeking before sparking consumer and political outrage in October of 2011 with their infamous (and short-lived) $5 debit card fee.
But what reasons would a consumer have to select a prepaid debit card in lieu of a free checking account? Probably not many, but a reloadable card might be preferable to consumers that want to use the card for budgeting purposes for themselves or their children (setting hard spending limits), and also of course for consumers that simply don’t qualify for a traditional checking account. If you’re turning down a significant number of checking account applicants, a prepaid debit card might be a good fit as a second chance checking type of product.
What is the true potential for these types of cards? Raddon’s National Consumer Research Survey shows that only 5% of the U.S. population currently uses prepaid debit cards, with an additional 26% expressing some interest in using a prepaid card in the future. There are significant differences when segmenting the results by age, with more than half of Gen Y either currently using or are likely to use a prepaid debit card (10% using, 42% at least somewhat likely to use).
The high “likelihood to use” figures, particularly amongst Gen Y, may be a sign that prepaid cards are evolving beyond just the traditional market of “unbanked” consumers, and might be poised to enter the mass consumer market.
So how big of a threat are prepaid cards to traditional checking accounts?
Sixteen percent of consumers told us they could envision a prepaid debit card replacing their checking account, with Gen Y once again showing they are more receptive to reloadable cards with 22% willing to do away with their checking account in favor of a prepaid debit card. Perhaps most surprisingly, it wasn’t just low income consumers that were on board with the notion of severing their checking account ties. In fact, consumers with household income in excess of $125,000 a year were just as likely as those making less than $50,000 to view prepaid debit as a checking account replacement.
Feeling threatened yet? Perhaps the marriage between American Express and Walmart for the Bluebird account isn’t quite as demographically disparate as it seemed on the surface. The most threatening aspect of the no monthly fee Bluebird account is that it’s not being marketed as a prepaid debit card at all, but rather as a checking account and debit card alternative. Watch their promotion video below, and count how many times they refer to the account as a prepaid debit card (hint, you won’t need many…well, any… fingers to keep track).
With all the talk of direct deposit, mobile check deposit, bill-pay, balance transfers, ATM withdrawals, sub-accounts, purchase and fraud protection, it sure does sound like a checking account. A key focus in the promotion of Bluebird as well as Chase’s Liquid card is the lack of fees compared to traditional checking accounts, particularly overdraft fees. There are no overdraft fees of course because the accounts simply do not offer that service, and purchases that are beyond the funds available are declined. So which is it, is overdraft coverage or lack of overdraft coverage a benefit to the consumer? The answer may be different for different people, which poses a challenge to financial institutions in how to respond to campaigns such as this. Perhaps it just calls attention to the importance of making fees transparent and clearly explaining the value of certain fee-based services that are not strictly punitive.
While the knee jerk reaction by some banks is to point out the Bluebird flaws (funds are not FDIC insured) and unfairness of it all (not subject to the same regulatory price controls as checking debit cards), the reality is that it’s a very attractive product for some consumers, and does represent a threat to traditional checking accounts. This isn’t to say that traditional financial institutions should expect to see customers leaving their checking accounts en masse, but it simply means more competition will exist for your customers’ and potential customers’ checking accounts. As the research suggests, this will be particularly true for Gen Y. Given the steady decline of paper checks being written, why would a Gen Y consumer need or want a “checking” account?
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