FRB: It's Banked Customers Driving Prepaid Growth!

We have been making the point in this blog that banks are losing checking revenues because their customers are using other means to transact that steal bank revenue.  A just-released study confirms our analysis.  The research by the Federal Reserve Bank of Philadelphia, A New Look at Who Uses Prepaid Cards, adds to the tsunami of evidence that GPR prepaid card growth is driven by full-service checking account holders, not the under banked.  Even more, the study found one-quarter of all U.S. households now use prepaid cards, and a whopping 45% of Millennials use prepaid.  Amazingly, the highest use was with from households with incomes above $50,000, and 96% of Millennials with household incomes about $100,000 use prepaid cards more than once a month.

Why are checking account holders, and particularly Millennials who the largest age cohort today, shifting transactions and revenues away from banks?  The research provides clear answers.  First, the card as a payment method has won the day, again particularly with Millennials, over cash and checks.  But then why prepaid cards rather than bank debit cards?

The answer is equally clear.  Prepaid cards allow the user to budget and allocate funds to specific spending as historically done with cash envelopes, not spend more than they have allocated on the card, and avoid overdraft fees.  The table below from the research documents these are the primary reason for prepaid use growth.  “Manage Money Better” and “Avoid Overdraft Fees” are the two major reasons for preference in using a prepaid card over debit cards, credit cards or other payment forms.

  

Of course the result is bank checking accounts are losing revenues, relationship value and payment relevance.  As another recent study documented, Millennials are specifically avoiding bank checking accounts and transactions to avoid fees, and these fees are clearly overdraft fees.

How can banks fight back?  Easy.  They can configure checking accounts to behave like prepaid.  That means 1) payments branding,  2) no overdraft fee account that is “return-all”  3) a companion card that enables individual card budgeting and security.  Add an online, automated liquidity option, and bank will steal back transactions, revenues and relationships they are losing.  Our clients call this approach PaySound.^®