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PCBB Banc Investment Daily March 21, 2013
Banc Investment Daily
March 21, 2013

HOP ONBOARD THE PREPAID TRAIN

Identity theft once again tops the list of complaints received by the FTC. Of the more than 2mm complaints received in 2012, 18% were related to identity theft. Given this information and the issue faced by so many banks to generate fee income right now, perhaps it is time to consider boarding the train of prepaid cards before it leaves the station. To gain a deeper understanding in this area, it is important to know that nearly 60% of all banks offer or plan to offer prepaid gift cards and 52% currently offer or plan to offer general purpose reloadable (GPR) cards, according to a November study from Mercator Advisory Group and the ABA. Further, of the banks that chose not to deploy prepaid products, 34% said regulatory compliance concerns was a driving factor and 26% said they were concerned about profitability of the product. Meanwhile, the growth rate for prepaid card transactions was more than 20% between 2006 and 2009, according to the Fed, pushing prepaid cards to the #1 most rapidly growing form of electronic payment during that time. Finally, a study by Mercator Advisory Group finds consumers loaded $57B onto prepaid cards in 2011 (up 33% from prior year); $82B in 2012 (up 44%) and are expected to load $117B this year (a 200% increase in 3Ys). If you're among the banks not yet offering prepaid products, you might be missing out on a fee-generating opportunity. What's more, you may be closing your doors to a growing segment of the population who are bypassing banks entirely and turning to reloadable cards for their financial needs. Indeed, a study published last year by the FDIC found 25% of households have used alternative financial services (like prepaid debit cards and credit cards) during that year. In addition, the study found that 29% of households do not have a savings account any longer and 10% do not have a checking account. Changes are afoot in the industry and it's not just the unbanked or young adults who are using these cards. The acceptance rate is growing among bank customers and older consumers as well. In fact, over 50% of consumers aged 35 to 64 years old bought prepaid cards between 2011 and 2012, according to a 2012 survey by Mercator. The competition is heavily involved as well. Consider new ATMs that can reload these cards, currently being rolled out nationwide by such banks as JPMorgan, Citibank, PNC, Bank of America and Wells Fargo to name a few. All of these large banks offer prepaid cards. As if that competition weren't enough, other players like American Express (Walmart Bluebird card), Green Dot, NetSpend and many others have also jumped into the fray. Ignoring the prepaid trend isn't a viable solution for any bank so it makes sense to do some research. For starters, there's fee income at stake. Just like debit cards, banks can charge prepaid card customers for making multiple ATM withdrawals and using a non-network ATM. Prepaid cards also reduce the cost to serve some customers. Moving lower profit customers to prepaid cards generates fees and also cuts down on the cost of maintaining these accounts. Negative publicity around overdraft fees is also negated through this vehicle. For banks that haven't yet climbed onboard the prepaid train, it's not too late. Most important is to understand the trend and act on it to avoid being left behind.