Can Prepaid Cards Fill a Durbin Void?
Prepaid cards deserve more love.
Shifting consumers from using debit cards to using prepaid cards to make payments is one strategy that would help banks recoup lost revenue from reduced debit interchange fees, heralds a report issued by Aite Group LLC this week.
“Clearly, banks are anticipating a significant loss in debit interchange,” Ron Shevlin, senior analyst at Aite and author of the report, tells Bank Innovation. “Their responses to this have been a little like chickens running around with their heads cut off.”
Eliminating free checking, adding new ATM fees and killing reward programs have all surfaced as ideas and/or realities floated by FIs to make up for the expected revenue deficiencies caused by the Durbin Amendment. Chase, for example, will be putting an ax to its debit card rewards program starting this summer, reported The Associated Press yesterday.
But that’s not the smartest way to go. Shevlin, for one, recommends that banks increase their prepaid market focus, rather than opt for the above strategies that will lead to “unwanted customer behavior” like increase use of checks and cash. The shift to prepaid cards, he explains, is feasible because there’s already a population of “heavy” prepaid card users and because prepaid cards are not exclusive to the unbanked, like many financial players believe.
“There’s a displaced notion that prepaid cards are for the unbanked,” says Shevlin. “There are a group of consumers, including Gen X and Gen Y, that are already making use of prepaid cards for budgeting purposes.”
Indeed, Aite Group believes that banks can recoup somewhere from 20% to more than 50% of anticipated lost debit card interchange revenue by marketing prepaid cards to their customers, particularly by focusing on rolling out the product to their “heavy” transactors. Plus, Shevlin points out the report’s research assumed the benefit for the bank was “strictly interchange gain” rather than also harbor assumptions on what prepaid cards’ monthly fees could be. Translation: There’s even greater revenue opportunity. Shevlin believes banks could price prepaid cards at better prices than existing prepaid card suppliers like Green Dot.
To achieve success, naturally, banks would need to incentivize their consumers to use prepaid cards, much like they did in the debit space, Shevlin explains.
“Many people who are heavy debit card users weren’t always heavy debit card users,” he says. “They are not wedded to debit cards.”
If the convenience of prepaid card is better than that of a debit card, and the fees associated with the product are lower than the market rate, the consumer behavior will shift, even with added ATM fees and reloadable fees associated with prepaid cards, he maintains.
Where Banks Might Go Wrong
Banks “could blow it” by hitting consumers both with fees for both prepaid cards and checking accounts, Shevlin points out.
“I fear they will look at [prepaid] as a standalone product and not something they market to existing checking accounts. They will look at it as alternative to checking versus something to integrate.”
Though Shevlin believes banks have already become more aggressive in prepaid, he doesn’t see those moves targeted at recouping revenue from lower interchange fees as much as reacting to the demand. He names U.S. Bank and BB&T as two institutions with offerings.
