KEY POINTS

  • Prepaid cards were originally a product aimed at the unbanked and underbanked, but they've evolved into something with broader appeal. As objects of stored value that don't require a bank account or credit check, prepaid cards appeal particularly to the financially underserved. But as prepaid products have become more robust and consumer attitudes have changed since the financial crisis, their appeal has grown for both the banked and unbanked. 
  • Prepaid cards are a small but fast-growing payment instrument in the US. In 2003, prepaid cards accounted for 800 million transactions worth $20 billion. These numbers jumped to 9.2 billion and $220 billion in 2012, and we estimate that prepaid cards will generate $317 billion in volume this year.
  • Millennials and Gen Xers are driving the adoption of prepaid cards. The two youngest adult generations in the US accounted for 80% of US prepaid card owners in August 2013. 
  • Prepaid cards cut across income groups. Among prepaid card owners, 28% earn less than $25,000 per year, 21% earn $25,000-$49,999, 26% earn $50,000-$99,999, and most surprisingly, 27% earn $100,000 or more per year.
  • Prepaid cards could disrupt traditional banking. Millennials, now the largest working generation in the US, largely have an aversion to credit cards. Moreover, debit cards charge high overdraft fees that many consumers identify as a huge motivating factor for adopting prepaid cards. Prepaid cards are opening an avenue for consumers to escape from the unsavory fees imposed by banks' traditional deposit accounts. 
  • Imminent CFPB regulations could limit prepaid's advantages. The Consumer Financial Protection Bureau (CFPB) is set to finalize regulations that could increase the costs of mounting a prepaid program, making this market potentially less attractive to issuers. These regulations could stall the industry's progress. 

Introduction

Prepaid cards come in a number of varieties, from general-purpose reloadable (GPR) cards, to reloadable transit cards, to nonreloadable cards such as gift cards and incentive cards. All play a role in the payments ecosystem. This report focuses on GPR cards because of their broad applications and potential to disrupt credit and debit cards.

GPR cards were originally aimed at serving the unbanked and underbanked — people with minimal access to traditional financing or bank accounts. Prepaid cards are more secure than cash because they represent an object of stored value whose funds are FDIC-insured. However, prepaid cards do not [...]