Prepaid cards grow in popularity

A prepaid credit card sitting on a keyboard

When someone decides it's time for a new debit or credit card, there are a wide array of options to choose from. Credit cards with cash back rewards or other incentives are attractive to many. The convenience provided by debit cards is a great quality.

However, increasing numbers of people are choosing yet another option: the prepaid card.

A prepaid card operates similarly to a gift card. You load money onto the card, and when that money is spent, the card is empty. The card is not linked to any checking account, so if you accidentally swipe on a purchase larger than what you had budgeted for, you don't run the risk of an overdraft fee. Users can reload money to the card as they see fit, and many people consider it to be a helpful budgeting tool.

When the concept of the prepaid card first came about, it was typically used by people without a bank account or low-income workers, according to FIS Payments Leader [1]. However, many institutions are discovering that the trend is growing among banked and unbanked consumers alike, and income has little to do with adoption rates.

New adopters

According to a report from the Pew Charitable Trusts, between 2012 and 2014, prepaid card usage increased more than 50 percent, and many new adopters had their own bank accounts already [2]. In fact, many of them purchased their cards from a bank at which they had an account.

Another study, conducted by Phoenix Marketing International and reported on by FIS, found that a growing number of millennials are using prepaid cards. In a survey of 4,201 people in 2013, 45 percent of respondents age 18 to 32 used prepaid cards, as compared to the 34 percent of respondents the year before. Generation X also increased usage from 27 percent in 2012 to 35 percent in 2013.

The study also found that users' income varied from less than $25,000 a year to more than $100,000 a year. The salary range that showed the most growth between 2012 and 2013 was between $50,000 to $99,000 a year. In 2013, 26 percent of respondents in this bracket had prepaid cards, while only a year earlier, only 16 percent did. The next-biggest leap was in the highest bracket, $100,000 a year or more, which grew from 18 percent in 2012 to 27 percent in 2013.

The intersection of younger and higher-income prepaid cardholders was called the "power user," those between the ages of 18 and 48, with incomes of $50,000 or more. FIS explained this showed how much consumers' views of prepaid cards has changed. The power user demographic is a new market that banks are beginning to market their prepaid products to.

Reasons behind the change

As consumer banking behavior changes, there is typically one or more reason driving the shift. One of these is the increased concern with security, according to FIS. The data breaches at big-name stores like Target, Home Depot and Michaels had consumers worried about their financial safety. Credit and debit cards are linked to other accounts, and a hacker getting his or her hands on a person's financial information can be detrimental.

"Prepaid cards offer users the ability to budget."

Prepaid cards offer security that debit and credit cards can't. Prepaid cards aren't linked to anyone's financial information or to a checking account in any way. If a person loses his or her card, or the information is stolen, the most damage the thief can do is whatever was loaded onto the card.

Another attractive feature that brings people in is the fact that prepaid cards are low-risk. It can be easy to let credit card spending to get out of hand. When that happens, a person can be left with a large amount of debt, and if it's a high-interest card, it can be difficult to get a handle on it. Plus, racking up debt or forgetting to make a payment are two good ways to bring down your credit score - something anyone who hopes to take out a mortgage or auto loan one day should avoid.

Debit cards don't pose as much of a risk for overspending or racking up high-interest debt, but many consumers have experienced the dreaded overdraft fee. It's not hard to forget what your account balance is, and it only takes a couple dollars over your limit to get charged extra. NBCNews pointed out that prepaid cards offer users the ability to budget more effectively because of this [3].

"A lot of people use these cards to keep from going into debt and avoid overdraft fees," said Susan Weinstock, director of Pew's Consumer Banking Project. "They've been burned by their checking overdraft fees and they want a product that they can put money on, spend it down and don't have to worry that they're going to spend more than they have."

Sources:
[1]. The World of Prepaid in 2015
[2]. Banking on Prepaid
[3]. Thinking About a Prepaid Debit Card? Here's What to Consider

The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its affiliates and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.