The market is still dominated by established players, including GreenDot and Net Spend. But the large banks are gaining market share by leveraging their existing customer base, according to Aite Group.
And at a fraction of the cost.
It costs JPMorgan 40 percent less to serve its Chase Liquid prepaid card customers than clients with a checking account, since the majority of transactions are electronic, said Ryan McInerney, the company’s head of consumer banking.
“Liquid customers are more comfortable serving themselves through mobile banking than other client segments,” said McInerney.
Regions Financial has already seen success in luring its prepaid card and check-cashing customers into traditional accounts. About 9 percent of the 230,400 customers who signed up for these services have opened a traditional account, said Bill Simpson, the bank’s senior vice president.
Consumer advocates say the industry has potential — much of it untapped. In particular, prepaid cards could help consumers build a credit history that would eventually give them access to home and auto loans.
Banks “can look at your history and glean what kind of financial life you’re living,” said Adam Rust, research director of Reinvestment Partners, a consumer advocacy group. “If they see you making regular payments every month to your landlord, they can invite you into their other services with a degree of trust.”
But banks don’t share data on prepaid cards with the credit bureaus, making it impossible for consumers to use them to bolster their credit scores. And many advocates are concerned that the nation’s largest banks are segregating lower-income people into a second-tier system that costs less to manage, has fewer consumer protections and is still largely outside the traditional banking system. Peddling a product known for high fees, they say, is no way to engage financially vulnerable communities.
Prepaid card operators are not always forthcoming about their fees, consumer advocates say. Consumers can be charged $5 a month just to maintain the card. They may also have to pay to speak to a customer service agent, check their balance at an automated teller machine or load money onto the card, consumer advocates say.
“The extent that people are choosing prepaid over checking raises questions about how banks are marketing these cards and how hostile bank accounts have become to low-income people,” said Deyanira Del Rio, associate director of the Neighborhood Economic Development Advocacy Project.
With the industry experiencing explosive growth, the Consumer Financial Protection Bureau is developing the first federal guidelines to govern it.
Those rules should require standardized fee disclosure, consumer advocates say. Consumers who deposit thousands of dollars on a prepaid card may not realize that not all cards are protected by government insurance, like a checking account is.
“Prepaid cards need to be covered under the same protections as traditional debit cards and checking accounts,” said Lauren Saunders, an attorney with the National Consumer Law Center.