Kevin Morrison

The U.S. prepaid card industry has come a long way in the last 20 years. What started as a very small stored-value idea has turned into an international market supporting numerous verticals, including retail, government, financial services, corporations and fintech. An entirely new industry has been created that includes processing, technology, distribution and regulation. Prepaid products are now a common payment option for consumers and businesses looking for alternative ways to spend, save and disburse funds.  

The Aite Group researched these prepaid products and platforms using industry executive interviews and its previous body of research. By analyzing information from Network Branded Prepaid Card Association (NBPCA), Visa and various other governmental and private entities, Aite Group has gathered comprehensive trends in the market, which includes prepaid usage and acceptance, expanded payment capabilities, digital banking, real-time payments and virtual card growth. 

Initially marketed as a one-time-use gift card or a financial product for the unbanked or underbanked, it has evolved into a viable product option in the digital payments industry. Prepaid platforms, processing capabilities and products are being leveraged to satisfy an ever-growing appetite for simple vertical payments integration. In part due to the ability to push real-time payments, integrated ancillary services via mobile application and an ever-growing need for electronic payments disbursement, prepaid is quickly becoming the product of choice.  

Mainstream product is now accompanied by a suite of supporting capabilities, including savings accounts, remote deposit capture and rewards programs. Businesses of all sizes are also leveraging prepaid functionality for employee expense management, one-time payments and business to consumer (B2C) disbursement. Prepaid capabilities are now integrated into open/closed digital wallets and person to person (P2P) applications and leveraged as a payment option in the “gig” economy. 

Companies have utilized networks and processors that are now capable of “pushing” real-time payments via electronic funds transfer to most general-purpose reloadable prepaid accounts. Growing adoption and higher redemption rates are impacting breakage revenue and expense reduction because of these prepaid capabilities.  

The role and size of the banks in the market vary across the industry. While some are considered full service and offer solutions across sectors, others are primarily focused on offering BIN sponsorship opportunities. Examples of such banks and issuers are U.S. Bank, American Express, JP Morgan Chase, Metabank, Fifth Third Bank, Bancorp Bank and Bank of America. 

Providers and/or program managers can offer a full suite of products and services, including processing, online/mobile interface, card embossing and portfolio management tools. Examples of these providers include Green Dot, NetSpend, Incomm, i2c, Transcard, First Data, FIS and Visa DPS. 

Digital Payment and Virtual Gift Card Usage Grows 

Aite Group estimates that virtual gift card and digital payment usage will result in 2020 prepaid card gross dollar volume (GDV) of $578 billion. The opportunity for prepaid debit continues to grow. When a payment’s requirement is identified in the development of a transit system, digital payments application, or a multifunctional college student ID, the simplicity and low cost of the prepaid product integration proves to be the most logical and effective choice. 

Based on the growth opportunities in digital P2P payments applications, the virtual gift card growth and the growing adoption of prepaid as a debit account in mobile wallets, the Aite Group estimates the overall industry GDV growth at a compound annual growth rate of 7.2 percent over the next five years, reaching $578 billion by 2020. 

There is very little difference between a debit card attached to a demand deposit account and a debit card attached to an omnibus account. From an operational standpoint, they function in the same manner: transactions process on the same network rails, both are PIN debit- and signature-enabled and both offer cash access at the ATM. From an industry standpoint, the difference is the regulatory impact on revenue. The primary differences from a consumers’ perspective are the application criteria, the process and the availability of overdraft. The fees and associated costs with either option vary based on program parameters and consumer behavior.  

Based on the most recent digital application payment integrations, open- or closed-loop, it appears Silicon Valley has made its decision. The virtual gift card product has been available in the market for a number of years, and it is no coincidence that the recent increase in sales parallels the growth of e-commerce. The ability to send, receive and transact with virtual cards in a frictionless fashion from a digital device will put extreme pressure on traditional merchants to quickly integrate a seamless digital customer experience. More important will be the ability to leverage that seamless transaction outside of the gift-giving season and market the virtual payment option through multiple channels on a year-round basis.  

Consumer adoption of the digital contactless payment will quickly transition to a need for a ubiquitous digital debit account. The image of customers rifling through their wallets, purses, or mobile applications to access the correct benefits card, payroll card, or gift card will give way to the “one decision, one click” transaction mindset. This type of interaction could be triggered from a point of sale that recognizes available health benefit funds in a multipurse application and notifies the customer accordingly. 

Kevin Morrison is a senior analyst on Aite Group’s retail banking and payments team. To learn more about Aite Group’s research coverage of retail and wholesale banking and payments, please contact Aite Group at info@aitegroup.com.